A collateral loan is a form of debt that’s secured by a valuable asset. Because the lender takes on less risk with a collateral loan, they often come with lower interest rates than unsecured loans. However, the consequences of not repaying a collateral loan mean you could lose that valuable asset — your car or home, in some cases — so be sure to weigh your options carefully.
Getting cash quickly can be difficult, especially if you have bad credit or an urgent need. But a cash collateral loan allows you to leverage an asset you already own to get money fast. Here’s what you need to know about using a cash collateral loan to get emergency funds.
What Is A Cash Collateral Loan?
A cash collateral loan is a secured loan where you pledge cash savings as collateral to borrow money. It works similarly to a secured credit card. You typically deposit cash into a savings account, and those funds act as your credit limit This deposit serves as collateral, protecting the lender from loss if you don’t repay your balance
The lender holds your cash deposit in a secured account. As long as you make your payments on time, you maintain access to the credit line. If you default, the lender can seize your cash collateral to recover losses.
How Do Cash Collateral Loans Work?
Here are the basic steps to get a cash collateral loan:
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Open a collateral savings account. You’ll deposit cash funds into a dedicated savings account to serve as collateral. The amount you deposit will determine your credit limit.
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Get approved for a loan. The lender reviews factors like your income credit score and savings deposit to approve you for a credit line.
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Access loan funds. Once approved, you can withdraw cash up to your credit limit. This provides you with quick access to emergency money.
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Make monthly payments. You’ll make payments each month to repay the balance. As you pay down the loan, funds become available to borrow again.
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Collateral is released after repayment. When you repay the loan in full, the lender releases the lien on your collateral cash deposit. You regain full access to the funds.
Benefits Of A Cash Collateral Loan
There are a few advantages to using a cash collateral loan rather than other quick funding options:
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Fast access to cash – You can get funds in your account within days of approval since the collateral deposit is already in place. This makes it a good option when you need money quickly.
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Competitive rates and fees – Interest rates are generally lower compared to unsecured loans or credit cards since your collateral deposit reduces risk for the lender. There are also typically lower or no origination fees.
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Improve credit – Making on-time payments can help build your credit history if you have little established credit.
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Access to larger loans – You may qualify to borrow more than with an unsecured loan since the collateral provides security for the lender.
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Reuse funds – As you pay down your balance, your collateral funds become available to borrow against again. This revolving credit line lets you reuse the funds as needed.
What Are The Drawbacks?
While cash collateral loans offer quick access to emergency funds, there are some downsides to consider:
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You risk losing your collateral deposit if you default. Make sure you can afford the monthly payments.
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Interest charges and fees will lower the net amount you get. Factor these costs into your budget.
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Your collateral funds will be locked in the account until you repay the loan and close the credit line.
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Lenders may have strict requirements, like a minimum credit score or high collateral deposit amount.
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It can be tempting to keep reborrowing as you pay down your balance. Avoid racking up excessive debt.
What Collateral Is Accepted?
For a cash collateral loan, lenders require a cash deposit to secure the line of credit. Typical collateral types include:
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Savings account – This is the most commonly used type of collateral for these loans. You simply deposit cash funds into a dedicated savings account owned by the lender.
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CD – Some lenders may accept a certificate of deposit (CD) as collateral. This locks your deposit in place for a set period of time at a fixed interest rate.
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Money market account – Money market accounts can also work as cash collateral, though they may earn lower interest than alternatives.
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Cash value life insurance – Certain life insurance policies accumulate cash value that you can borrow against. This provides a way to use your policy as collateral.
The lender will specify which types of cash accounts are eligible. A standard savings account is generally the easiest to use as collateral for quick access to funds.
What Are Collateral Requirements?
To get approved for a cash collateral loan, you’ll need to meet the lender’s collateral requirements:
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Minimum deposit – Most lenders require at least a few thousand dollars as a deposit to issue a loan. Some may allow smaller minimums for smaller credit lines.
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Loan-to-value ratio – The lender will only lend up to a certain percentage of your collateral deposit, such as 80%. This protects them if you default.
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Cash funds – Collateral must be in the form of an eligible cash account, not other assets like stocks or property. Funds must be deposited before getting approved.
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Ownership of deposit – The savings account with the collateral funds must be titled in your name only. Retirement accounts and joint accounts are typically ineligible.
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No liens – Your collateral deposit cannot already have liens or legal claims from other creditors. You must have clear ownership of the funds.
Make sure you have enough cash in an eligible account to meet the minimum requirements in order to use the funds as collateral for a loan.
How Much Can You Borrow?
The amount you can borrow depends on how much cash you have available to pledge for collateral. Most lenders will lend 50% to 90% of your collateral deposit amount.
For example, if you deposit $10,000 in collateral savings, you may be approved to borrow between $5,000 and $9,000. The specific loan-to-value ratio depends on factors like your credit score.
Having a larger cash deposit allows you to access more funds. Make sure to deposit as much as you can afford to increase your potential credit line while still maintaining some liquid emergency savings.
What Are Interest Rates And Fees?
Interest rates on cash collateral loans will vary by lender but are generally competitive compared to alternatives. Rates often range from 5% to 15% APR. Your specific rate depends on factors like your credit score, income, and loan amount.
In addition to interest, common fees to expect include:
- Origination fee when you open the loan (typically 0% to 5%)
- Annual fee to maintain the credit line
- Late fees if you miss a payment
- Early termination fees if you close the account soon after opening
Compare rates and fee estimates before choosing a lender so you understand the total costs. Also factor in how long you need the loan. A 12-month loan with a 5% origination fee will have a lower effective APR than a 6-month loan with the same fee.
How To Get A Cash Collateral Loan
Follow these steps when seeking a cash collateral loan:
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Check your credit score. Many lenders require fair or good credit scores above 620 or 640 to qualify. Boost your score if needed before applying.
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Choose a lender. Compare options from banks, credit unions, and online lenders. Make sure they offer cash collateral loans.
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Open a collateral account. Deposit funds into a new savings account with the lender to serve as your collateral.
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Apply for the loan. Complete the application providing details on income, employment, and your collateral deposit.
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Get approved. The lender will review your creditworthiness and collateral account to approve a credit line.
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Withdraw funds as needed. Once approved, transfer cash from the credit line to your checking as needed to use the loan proceeds.
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Make monthly payments. Be sure to make at least the minimum payment by each due date to avoid late fees and default.
With some planning and research, a cash collateral loan can provide fast access to emergency borrowing when you need funds quickly but have limited alternatives. Just be cautious borrowing only what you can afford to repay.
Frequently Asked Questions
How fast can I get funds from a cash collateral loan?
Once approved, you can generally access funds in 1 to 3 business days. It’s one of the fastest funding options available since your collateral deposit is already in place.
Where can I get a cash collateral loan?
Banks, credit unions, and online lenders may offer cash collateral loans. Compare quotes from multiple lenders to find the best rates for your situation.
Can I get a cash collateral loan with bad credit?
It’s possible, but more difficult. Most lenders will require a minimum credit score around 640. Boosting your score can improve your chances of approval.
Are cash collateral loans taxable?
If you use loan proceeds for personal expenses, it is not taxable. If you use the funds for business purposes, interest may be tax deductible. Consult a tax advisor about your specific situation.
Can I lose my house with a cash collateral loan?
No, a cash collateral loan uses cash savings as collateral, not your house. You only risk losing the deposite
Types of collateral loans
There are a variety of types of collateral loans. The following are a few of the most common ones:
With a traditional mortgage, your house is the collateral. If you default, you risk losing your home in foreclosure, which means you’ll no longer own the property.
As with a mortgage, your home serves as the collateral you’ll need for a home equity loan. This type of loan lets you draw against the equity you’ve built up in your home and receive a lump-sum payment that can be used for a variety of uses, like home renovations.
A home equity loan comes with a fixed interest rate, but you’ll need to keep up with your monthly payments to avoid damaging your credit or losing your home.
Auto loans are secured by the vehicle you plan to buy, like a car or SUV. While there are unsecured car loans out there, the majority are secured by the vehicle because they offer the best interest rates.
If you default on your loan, your lender may repossess your car. However, because cars tend to lose their value so quickly, some lenders may be willing to defer payments or offer loan modification to avoid repossession.
If you need to borrow a small amount of money for a short period of time, this type of loan lets you borrow against your car title. However, it’s best to avoid car title loans since they typically have to be repaid within 15 to 30 days, come with fees and usually carry high interest rates. If you default, the lender can seize your car.
A secured personal loan can be used for almost any purpose, like fixing a home or consolidating debt. As collateral for this type of loan, you may be able to use a personal savings account or CD. But if you default, you risk losing those assets.
What are collateral loan rates?
Collateral loan rates are dependent on the type of loan and the collateral you have to offer. Typically, the more valuable your collateral, the lower the rates you may receive.
| Loan type | Collateral | Typical rates |
|---|---|---|
| Mortgage | Home | Averaging 7.90% APR for 30-year-fixed mortgages |
| Home equity loan | Home | Starting at 7.99% APR |
| Car loan | Vehicle | Starting at 4.50% APR |
| Car title loan | Vehicle | 300% APR |
| Personal loan | Savings account or other collateral | Up to 36% APR |