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Posted 30th June 2021

A Guide to the Types of Collateral

If you are applying for finance such as a Lombard loan, you might have to put forward some form of collateral as a guarantee. What works best as collateral? Let’s take a look at some of the options that you could decide to use.

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A Guide to the Types of Collateral
Collateral

If you are applying for finance such as a Lombard loan, you might have to put forward some form of collateral as a guarantee. What works best as collateral? Let’s take a look at some of the options that you could decide to use.

 

Why Do Some Lenders Ask for Collateral?

Since lenders tend to give out large amounts of money to borrowers, they need some sort of guarantee that they will see the money repaid. For this reason, they ask for collateral. Collateral tends to be important assets that the borrower owns. Should they fail to make good on the repayments of the loan, the lender can claim the collateral as compensation.

Obviously, the collateral usually represents something that the borrower does not want to lose. It is a good idea that borrowers search for a good financial advisor who can help them to navigate this area. Many lenders are willing to be a bit flexible, but having an expert firm like Enness Global on your side will help you to negotiate and navigate your loan a lot more successfully.

With a clearer picture of its purpose, let’s take a look at some of the assets that can be used for collateral.

 

Property

One of the classic options for collateral will always be property. This is an easy asset to be turned over in the event that payments can’t be made. Properties are a great choice as they tend to be quite high in value but do not depreciate rapidly as some others might.

Properties could be the borrower’s own home, or they could represent part of a real estate portfolio. If the borrower has the assets to offer, this can end up being a fairly flexible form of collateral. Of course, using one’s own home as collateral can also be something of a nervous experience.

 

High-Value Assets

Another great option that often gets used for collateral is high-value assets that the borrower might own, that are not property. These could be vehicles like a car or a boat, or could represent some form of collection the borrower might have such as art pieces or jewellery.

These can be very high in value and again easy to claim in the event that the borrower defaults on the loan. If the borrower has spent some time accruing a high-value collection in some particular area, choosing to make this collateral over something like a property could be preferable. Of course, the value of the collection would most likely have to be assessed by a third party before the lender accepts it as collateral.

 

Inventory

If an entrepreneur is searching for collateral for a business loan, they will often use the inventory of their company as collateral. This could be some of the stock their company currently holds, but it could also be equipment that they might own.

This is a flexible option that many businesses choose to use. Since many companies will take out a business loan at some point in their lifetime, using inventory as collateral can be a fairly common practice.

 

Bitcoin

Bitcoin has also proved to be a very useful form of collateral. It is high-value, and though it can depreciate in value as the markets change, it is still a fairly stable form of collateral.

It is also very easy to transfer in the result of the loan being defaulted on. Trading bitcoin is almost cost-free, and records on blockchain mean that an accurate report of the transaction can easily be generated.

 

Can You Borrow Without Collateral?

Since many can be nervous about the idea of putting something forward as collateral, they might want to look for some other loan options that do not require the potential loss of assets. Loans without collateral are called unsecured loans. They can be found from many different lenders.

However, because they don’t have collateral attached to them, they are considered to be much more high risk for the lender. Therefore, they can be more reluctant to give these loans to borrowers, especially if they are new customers who do not have much in the way of a lending history.

If you wish to take a loan of some sort, whether this is a high-value mortgage, a Lombard loan, or some other line of credit, it is important that you fully understand how collateral works. The items used for collateral will no doubt be extremely important to you, and you will have worked hard to gather them. Defaulting on a loan can often be avoided, even if it means that you have to renegotiate the terms of the loan with the lender and you would not want to lose your assets due to carelessness. Offering collateral is nothing to be afraid of, but you do need to ensure that you fully understand it.

Categories: Finance, News


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