What are the Types of Collateral?

There are two types of loan which a lender may grant. The first one is an “Unsecured Loans” where the lender grants the borrower an amount without any security that the loan will be paid in full.

The other type of loan is a “Secured Loan” where an asset is pledged to secure the loan in case of borrower’s default on payment. The asset placed on lien allows the lender to sell the assets to recover any loss incurred from borrower’s default. This asset placed on lien is called a “Collateral”.

Under a secured loan, there are types of collateral that can be used by a borrower as a security.

  • Real AssetsImage result for financial assets icon

Real assets are properties owned by the borrower that are often used as collateral. Most lenders prefer this type of collateral as it is high in value and often appreciates. Any real property that is subject to depreciation such as houses or buildings often depreciate slower relative to the value of the loan.

  • Tangible Assets

These are physical assets excluding real property. Tangible assets are subject to depreciation and are often considered as collateral subject that the value of the asset exceeds the value of the loan. The reason for this is that tangible assets often have a short life and the value of the asset drop rapidly during the depreciation period. The dropping of value is often quicker than the current value of the loan after payments. Examples of these tangible assets that can be placed on collateral are cars, inventory and / or equipment.

  • Intangible AssetsImage result for Intangible Assets

Intangible assets are assets that have no physical attribute such as cash accounts, equity portfolios and accounts receivable. This type of collateral may be advantageous for a lender as this type of asset is considered to be more liquid compared to tangible assets. There are cases where a lender would avoid equity portfolios as collateral due to the nature of its volatility.

A lender may accept a collateral to ensure that a debt is secured. The primary goal of a lender is to ensure the collectability of the money that has been granted as a loan. Having a collateral at hand minimizes the risk of incurring loss.


What Are the Pros and Cons of a Loan?

Loans have been one of the most lucrative business in the financial market due to the need and the effects it can bring to an economy. Loans are one of the primary reasons to ensure that money moves around the financial market. With more money that is moving, the market helps the economy rise. But do we know the reason why an individual or a business needs to take on a loan? Here are a few points showing the advantages and disadvantages of going into a loan. Being aware of these points will greatly help decide if we need to get one.

Pros:Image result for pros of loan

  • Loans help you finance a purchase of goods and service without initially using your own resources. The money can also be borrowed if the current resources you have is insufficient but know that your future resources can pay for what a borrower is buying. A loan helps you move future resources into the present.
  • Credit score is increased if the loan is paid on time and managed properly. This credit score allows you to negotiate and loan on some clothing online stores for lower interest rates on credit and other loans that are available in the market.
  • Loans can provide opportunities to further earn. This would be quite reasonable if the expected income from the loan would produce a higher amount than the current interest it carries with it. A loan can be used to capitalize on business and other investments that bring high interest earnings.
  • Loans can be used to finance other loans but this will be advantageous if the interest rate of the new loan is much less than the old or consolidated loans. Your current credit score or standing with other lenders may be affected.

Cons:Related image

  • Metrobankdirect personal loans can be additional burden and for part of your monthly expenses. If careful planning and consideration has not been made, a loan can become more of a financial inconvenience rather than a benefit.
  • Because of the interest rates it carries, loans allow you to purchase goods and services at a higher price. Also loans come with other fees that may further increase the cost of your initial purchase.

Loans are very useful means to support an expenditure. A borrower needs to weigh the benefits it can bring with careful planning and financial study.

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