Have you thought about getting a collateral loan? If so, it’s very important that you understand the loan terms. Under the right circumstances, a collateral loan can work in your favor, but you also have a lot to lose. Here are a few facts to help you decide if this type of loan is right for your situation.

What is a collateral loan?

A collateral loan is a secured loan, which means that the lender has the added protection of being able to take something you own if you don’t pay. Since the lender has this protection, the loans usually have lower interest rates.

The borrower should be very careful because something you own is at risk. Make sure you have a surefire plan for being able to make every payment on time. Some collateral loans have clauses that make it impossible for the loan to be paid off before the specified time. Make sure you know whether or not the applies to your loan.

What qualifies as collateral?

Each lender has its own rules, but collateral can be anything valuable that you legally own. The most common types of collateral are cars and houses.

Other assets like collectibles, investment accounts, and even cash (in an account) can also be used as collateral.

Why use this loan?

These loans are perfect for getting cash quickly. Since the lender can take your assets if you default, the loan application process is usually shorter. It’s also a great way to liquify (or get cash for) assets.

If you have money in a CD or a 401k, you’ll pay a fee for withdrawing the money. A collateral loan can give you the cash without touching your savings account. As long as you can pay the money back within the allotted time, you win!