Collateral Loans of March 2023

Sometimes, we encounter circumstances when we urgently need money. Taking out a loan from a bank or a financial institution has proven to be a better way out of such situations without falling into a swamp of debt or maxing out your credit card, as you may have considered. It is easier to secure loans in the Philippines if you have valuable assets like a house, car, or expensive jewelry to set up as collateral. This is called a collateral loan; you can get the loan at lower collateral loan rates. If you are wondering how collateral loans typically work, here's all you need to know about collateral loans.

What is a Collateral Loan?

A collateral loan refers to money taken out from a bank or any other financial institution on the basis that the borrower pledges a valuable asset as collateral to the lender. This can also be called a secured loan. On the other hand, when you borrow money without pledging support as collateral, it is referred to as an unsecured loan, which will help if you have a high income and a steady credit history. Unsecured loans also issue fewer loan payments generally used for personal finance.

This may appear to be a risky endeavor on the part of the borrower. However, collateral makes it easier to get this type of loan at lower collateral loan rates. You also have a better shot at acquiring higher loans when you have collateral.

The type of asset pledged as collateral depends on the type of loan the borrower wants to take out and the lenders' preferences. Valuable assets like cars, savings accounts, jewelry, life insurance with corresponding cash value to the required loan, investment portfolio, future paychecks, houses, and other valuables are good examples of assets that can be used as collateral to borrow money in the Philippines.

Collateral loan rates in the Philippines can differ among banks and lenders. They may also vary depending on the type of loan to be secured. However, the standard interest rate for most loans is usually about 1.8% per month for 1-3 years for a minimum of ₱10,000 and a maximum of ₱20,000,000.

What are the major types of collateral loans?

As earlier mentioned, collateral loans require an asset to secure them. Here are some significant types of collateral loans:

Auto loans

When loans are taken out to foot expenses regarding a truck, motorcycle, car, ship, or private plane with the automobile serving as security, they are referred to as car loans. If the borrower doesn't meet the replacement terms or fails to make the loan payment after the grace period, that vehicle can be possessed by the lender. In some cases, however, due to the reducing value of cars and other automobiles, several lenders may work with the borrower to ease the repayment terms and make it easier to repay.

• Mortgage Loans. These are commonly referred to as home loans. This is because they often finance real estate or general housing expenses. Title documents (documents proving ownership) for the real estate or house being financed are required as collateral. If the borrower defaults on repaying the money, the lender can sell the house to replace the amount borrowed. Mortgages incur an interest rate of 8.5%–9.7% for a minimum and maximum of ₱5,000,000, respectively.
• Personal Loans. We can take out personal loans for almost any reason, such as to finance high-ticket items or consolidate credit card debts. It can also be fixing your house, paying for college, or paying medical fees. Apart from coming in the form of a secured loan, personal loans can come as unsecured loans too. However, putting up your assets as collateral to get a personal loan would get you lower interest rates, higher amounts, and better repayment terms. Personal assets can be used to secure personal loans like vehicles, jewelry, certificates of deposit, cash, stocks, future paychecks, savings accounts, and collectibles.
• Home Loans. This is one of the common forms of loans available in the Philippines. From the name "home equity loan", you can already take a wide guess of what this loan is for. A home equity loan is similar to a mortgage since your house is used as collateral to secure. The difference between a house equity loan and a mortgage is that the latter allows you to take up loans using the equity built up in your house. Such loans usually come with a fixed interest rate and would mean losing your home if you, as the borrower, fail to repay the money after the grace period.
• Car Title Loans. These short-term loans involve borrowing small amounts of cash against one's car title (legal documents proving ownership). One payment term of a car title is that payment must be made within 30 days. If the borrower does not repay the loan after this time frame, the lender takes possession of the collateral. Car title loans come with higher interest rates, so taking out a personal loan is advisable instead of a car loan.

How to Apply for a Collateral Loan

If you are looking to apply for a collateral loan, you must take the following steps:

• Review your credit scores. It has already been established here that securing loans with collateral gets you easier approval to borrow money even with a relatively poor credit score.
  On the other hand, unsecured loans would require a high-income rate and a good credit score to secure, which is way more complicated. However, borrowers with high and stable credit scores stand a better chance of qualifying for lower interest rates, getting higher loans, and getting better payment terms.
  Check your scores to ensure they are error-free and have no negative marks, such as previous due payments that need to be rectified before you apply for a loan.

• Decide what to use as collateral. At this point, you should consider your valuable assets to secure the loan you need. You would have to choose investments that are liquid and easy to access. If you are going for a home or auto loan, your collateral would be the property you are financing.
  On the other hand, if you are going for a personal loan, you have a more extensive array of options. You can use your savings account, jewelry, vehicle, future paychecks, collectibles, and other valuable assets as collateral to borrow money.

• Get your documents ready. Ensure you get all the needed information and documents prepared before time. You may be required to provide information like your name, date of birth, SSN (Social Security number), driver's license, or any other approved government-issued ID, proof of assets and income like your current tax returns, pay stubs, and a list of all existing debts to be paid.

• Prequalify with more than one lender. Lenders have different payment terms and collateral interest rates. Before applying for the loan, it's beneficial to prequalify with other lenders and compare their loan interest rates and their terms for better loan deals.

• Apply for a loan offline. When you find a suitable loan offer you feel comfortable with, it's time to complete the application process. You can start with selecting the lender of your choice. Afterward, get their loan application form and fill it out for the specific loan you want to secure along with the requirements. Once everything is finalized, please, submit it to the lender and wait for their response.

• Apply for a loan online. You can also apply online; visit the website of your desired lender. Click on the form for the specific loan you wish to use. Fill in your details as demanded. Submit the form.

• Pick up your loan. Secured loans such as mortgages can take two or more weeks before you can receive your loan cash. However, you can receive your money within a shorter time frame than with any other secured loan. If your loan was connected with your savings account or certificate of deposit, you could receive your money in one business day.

What are the main requirements for getting a collateral loan?

While it has been established that most loans can be secured with collateral for various purposes, you must know the requirements for securing a loan in the Philippines.

• Credit scores and interest rates history. The borrower's credit score is one of the essential requirements for securing a collateral loan. Credit score history can range from about 300-850 and is usually based on factors such as payment history, amount of unpaid debts, and the longevity of the borrower's credit score history. Lenders may require that the individual borrowing a loan has a minimum credit score of about 600 to qualify. In contrast, some other lenders may not require a credit score history or information on your interest rate to grant you a loan.

• Collateral. Some lenders would require you to pledge valuable assets as collateral when requesting a loan. In a case where a loan is for financing a vehicle or house, a lender accepts collateral related to the purpose of such loans. However, you can use other unrelated assets as collateral, including savings accounts, payment checks, real estate, investment accounts, and collectibles, to borrow some cash. If the borrower does not satisfy the payment requirements, the lender will take the collateral as payment. Unsecured loans do not require collateral. However, you would need a high-income rate, which is tough to secure.

• Information on the borrower's income. Some lenders insist on having detailed information about a borrower's income history as a requirement before accepting their request to borrow some cash in the Philippines. The minimum income history required differs from lenders. In other situations, credit unions may not request your income history. In any event, it is critical to have this criterion available when evaluating a loan. Evidence that proves your income history includes your monthly bank statements, a signed letter from your employer if you are an employee, bank deposits if you are self-employed, and pay stubs.

• Origination fees. This isn't part of the process of applying for a loan. However, some lenders require the individual who desires to take out cash to pay an origination fee, which will cover the costs incurred during the application processing, running of credit checks, and closing. An origination fee often ranges from about 1% to 8% of the loan amount. It depends, however, on other factors such as the borrower's credit score and the amount borrowed. On the other hand, you can find cases where a credit union accepts origination fees at closing.

• Personal information. When applying for a loan, you must present documents and info like your date of birth, name, SSN, and an approved government-issued ID as proof of your identity.

• Purpose of the loan. While several lenders do not restrict loan usage, others, like banks, will require information on how you plan to spend the money. Lenders also find it easier to release loans when they are confident that their usage will yield profits that can be used to settle the amount borrowed. Reasons such as improving cash flow, purchasing equipment, paying for expansion projects, and inventory financing are acceptable to some lenders as the purpose of the loan. Other financial institutions or online lenders may not have restrictions placed on loan usage. You can consider applying for a loan from them if you do not want to go through the stress of meeting up with these requirements.

How to Repay a Collateral Loan Debt

When a loan is taken out using collateral, the borrower is expected to pay it back within the time specified in terms of payment. However, when the borrower doesn't pay within the specified time frame, the collateral is taken possession of by the lender as a repayment for the amount borrowed. The interest rate is charged based on the time frame between when the loan was released and when the borrower pays back the cash in full and on the contracted rate.

It is, however, advised that a borrower explore every available option to try repaying the cash before opting for bankruptcy protection. This is because bankruptcy protection affects a borrower's capacity to obtain future loans. Some alternative options to bankruptcy include acquiring support from assistance programs, applying for loan consolidation, and earning more income.

Depending on the loan taken out, the lenders specify in their payment terms actions to be taken by the borrower if they cannot repay the money within the specified time frame.

Reaching out to the lender to explain any existing issues is best. Inform the lender of setbacks experienced like employment and health issues which can affect one's ability to repay a loan within the specified time frame. Most lenders are likely to offer special terms of payments for such circumstances.

The pros and cons of a collateral loan

Although securing a loan is a preferred way of settling financial issues, collateral loans have disadvantages. Therefore, you should think about all the pros and cons before making the final decision.

Pros

• Your loan request can be quickly approved. If you don't have a good credit score history or any credit issues that make it challenging to secure a loan, requesting a loan with a valuable asset as collateral can quickly get your request for a loan approved.

• You can easily qualify for a higher loan. Securing a loan with collateral gives you higher chances of getting a larger loan since the lender has more security and confidence that the loan given out will be repaid either way. Unsecured loans, however, do not allow for larger loans.

• You can get your assets liquidized within a short period. There are instances where you may have assets that are difficult or take a long time to convert to cash, like houses or jewelry; a collateral loan can quickly be taken to get you the needed cash without going through the complex process of trying to convert those assets to money within a short period.

Cons

• You are faced with the risk of losing your collateral if you default on the loan terms. This is the highest disadvantage of taking collateral loans. You can quickly lose your assets if you fail to pay them off, and it can be very damning, especially if the collateral is something as valuable as your house.

• You can not take a collateral loan without an asset. It is not possible to take out this type of loan without support, and trying to secure a valuable item to use as collateral can be difficult and tasking, most times impossible. You can get an unsecured loan without collateral, though you would need a very stable credit history. You may be left stranded if you cannot qualify for an unsecured loan.

• You may be required to pay a prepayment fee. You may be able to repay your loan within the time frame; in such cases, the lender may require you to pay a prepayment fee. This is a fee a borrower charges when they want to repay a loan before the specified time frame. You may decide to wait till the specified time and use the money before then, which would risk losing your collateral.

Legal regulation of collateral loans in the Philippines

According to the Securities and Exchange Commission (SEC) directives, all loan offers in the Philippines must specify the general terms that define the legal duty of the parties involved. The interest rate, loan terms breach of contrast (in case of any), and loan security must be clearly stated as done below:

• Information of the parties involved. Personal data of both borrower and lender must be stated clearly in the loan agreement. This information has to include their names, date of birth, SSN, addresses, and phone numbers.

• Choice of law. The laws ruling specific parts of the loan may vary depending on the province. As per the governing body, it is essential to state the law that would be applied in the loan contract and clarify all the details with the borrower.

• Severability clause. It states that the terms of each agreement are independent of the other. Therefore, if the court declares one condition of the agreement as unenforceable, it doesn't mean the other conditions are.

• Entire agreement clause. It covers former agreements and defines the final agreements made in the negotiation, both written and oral.

The actual cost of a collateral loan

The actual cost of collateral loans is relative to their collateral values. This is referenced as LTV (loan to value ratio). In a situation where a loan of ₱800,000 is taken on a house worth ₱1,000,000 as collateral, the cost of the loan would be 80%. The collateral cost methods can vary based on the kind of valuables used as collateral. If one secured a loan by publicly traded stocks, the present market of such securities is used when estimating the fair market value of the collateral.

Suppose the collateral pledged is in the form of privately held shares or rare alternative valuable assets like fine art. In that case, an appraiser will need to utilize specific valuation techniques like using DCF (discounted cash flow analysis) to calculate the value of the private shares.

For fine arts and other rare valuables, a specialist familiar with the auction market will need to appraise such assets. The minimum loan amount is ₱30,000, and the maximum loan amount is ₱2,000,000. The amount borrowed remains subject to the bank's approval depending on the income documents provided.

The ERI (effective interest rates) of cash loans in the Philippines range from about 1.2% to 24%. Effective interest rates are used to measure the cost of taking out a cash loan. It comprises the charges below:

• Monthly amortization fees. The estimated monthly amortization fee for collateral loans ranges from about 1.2%-12%. It is charged from loan payments made per month.

• Processing charges. The processing charge for a loan is ₱2,000. It is deducted from proceeds made from the loan.

• Late payment charges. The charge for late payment is 3% of the due amount borrowed or ₱500 when much higher.

• Check bounce charges. When a check is returned or bounced as a result of insufficient funds, an amount of ₱1500 is charged.

• Stamp duty. The fee for stamp duty is ₱1.5 for every ₱200.

Conclusion

Taking out a loan has proven to be a better approach to raising funds to settle financial needs. When a loan is taken out with a valuable asset pledged as collateral, it is referred to as collateral loans or secured loans. Such loans are more manageable, allow you to get larger loans, and often come with lower interest rates. When the borrower defaults on the payment terms, the lender can take legal action against him and possess the collateral.

You can use valuable assets like a car, jewelry, inventory financing, savings account, and more as collateral to borrow money. These valuables, however, have to correspond in value to the loan amount. For instance, if you are taking out a loan of ₱1000, the asset you use as collateral should have the same value. You can take out different loans such as mortgages, home equity, car, personal, and car title loans.

You will be required to present some information and documents like your personal information, bank statements, credit history, and more.