When it comes to borrowing money, there are a lot of different options to choose from. In fact, the decision-making process surrounding personal loans can often be overwhelming. That is why we are here: to simplify all of that information into one concise, clear article that will help you better understand your borrowing options.
Today, we are focused on the distinction between regular personal loans and collateral loans. We will break down what each type of loan means as well as some key factors to consider with each option. By the time you are done reading, you will have a robust understanding of these diverse borrowing choices and, hopefully, a better idea of which is best for your unique needs.
What Is a Personal Loan?
A traditional personal loan is a type of unsecured loan that you can obtain through your regular bank or through an online loan provider. Like most unsecured loans, personal loans require you to submit to a credit check and provide proof of income statements (usually tax returns or pay stubs) in order to demonstrate your ability to pay back the loan. Once a bank or other loan provider finds you eligible, you will be able to borrow money that you will pay back over a predetermined period of time. You will also pay interest on the loan.
Personal loans are a common option for borrowing, but they are not always the most advantageous pathway out there. For anyone with poor credit, low income, or a challenging financial history (such as past bankruptcy), it may be difficult to get approved for a personal loan. You also may be offered a personal loan with a prohibitively high interest rate. However, in some cases, personal loans are an appropriate option for those trying to borrow smaller sums of money or those who do not have assets to leverage for a collateral loan.
What Is a Collateral Loan?
A collateral loan is an alternative to a personal loan, and it is also called a secured loan. Basically, instead of relying on your credit score or proof of income statements to determine your eligibility for a loan, collateral lenders offer you a loan as a percentage of the value of your leveraged item. You are borrowing against an asset that you already own.
For example, consider that you are taking out a collateral loan against a Rolex watch. First, the lender will determine the market value of the watch. Perhaps that value is $100,000. Then, they will offer you a loan as a percentage of that value. Here at AMETA, we offer loans on luxury watches between 60% and 80% of market value. So, you could be eligible for a loan of up to $80,000 when you borrow against a Rolex worth $100,000.
Collateral loans are less risky for the lender than traditional personal loans. This is because, should you fail to pay back the loan, the lender has a simpler pathway to recouping their losses: They can repossess and sell your leveraged item. More commonly, however, you will pay back your loan on time and get your item back in the same condition that you left it.
This security for the lender also translates into benefits for the borrower. With collateral loans, borrowers often see higher loan amounts, lower interest rates, and other perks. Plus, there are no annoying credit checks to worry about. Of course, you do need to own a high-value asset in order to be eligible for a collateral loan.
Personal Bank Loans vs. Collateral Loans: Comparing Key Factors
Now that you have a better understanding of these two borrowing strategies, we will break down some key considerations and compare personal bank loans and collateral loans.
Loan Amounts: How Much Can I Borrow?
Wondering how much you can borrow with a personal loan or collateral loan? The difference in the answers might surprise you.
Personal Loan: With a personal loan from a bank, most lenders cap the loan amount at $50,000. Some lenders may go up to $100,000, but this is much less common and is typically only offered to those with excellent credit or very high income. Either way, it is significantly less than what you may be allowed to borrow with a collateral loan.
Collateral Loan: Collateral loans are typically offered as a percentage of market value of the item you are borrowing against. So, the more valuable the item that you leverage, the more money you will be able to borrow. Here at AMETA Finance Group, we provide collateral loans of up to $5 million. You can combine multiple watches or pieces of jewelry to access higher-value loans, as we offer loans at 60% to 80% of your item’s market value. In short, you could access up to 100X the amount that most personal bank loans are capped at!
Interest Rates
Interest rates are another huge difference between personal loans and collateral loans. Personal loan interest rates often vary based on credit score, while collateral lenders are more likely to have fixed interest rates for all of their different borrowers.
Personal Loan: The average person loan interest rate in the United States right now is about 14.48% for someone with “good” credit. But those averages differ significantly depending on credit score. Here is the breakdown of average interest rate based on credit score, according to NerdWallet:
- Excellent credit (720+): 11.81%
- Good credit (690-719): 14.48%
- Fair credit (630-689): 17.93%
- Poor credit (below 629): 21.65%
As you can see, your interest rate for a personal loan depends heavily on your credit score. You can think of interest rate as “the cost of borrowing money,” and it is typically measured as APR, or annual percentage rate.
Collateral Loan: With a collateral loan, your interest rate does not depend on your credit score. Collateral loans typically come with significantly lower interest rates than their personal loan counterparts. At AMETA, for instance, our standard interest rate is just 4%.
Turnaround Time
Obtaining a personal loan through a bank often takes more time than getting a collateral loan. While a collateral loan usually involves an appraisal, a personal loan through a bank may have waiting periods or other delays due to credit checks and verifying income information. Once you have signed a loan agreement with AMETA, we can wire over your loan in just 24 to 48 hours.
Repayment Schedule
Typically, you will have some say in the repayment schedule you choose for both personal loans and collateral loans. Longer repayment terms mean lower monthly payments, but they also mean higher interest costs in the long term. As such, you want to pick the shortest repayment term possible while still keeping the monthly payment manageable.
Personal Loan: A personal loan will often have repayment terms ranging from 12 to 60 months.
Collateral Loan: At AMETA Finance Group, we offer loans for up to 12 months, but we specialize in short-term loans of 3 to 6 months. This helps keep your interest costs extra low!
Credit Score and Eligibility
For a personal loan, you will normally need to undergo a credit check. As we discussed in the “Interest” section, less-than-perfect credit can have a major impact on the interest you pay. This makes personal loans a challenge for those who are still working on building strong credit.
On the flip side, collateral loans do not require a credit check in order to borrow. Instead, you prove your ability to repay the loan by leveraging a high-ticket item, such as a luxury watch, piece of heirloom jewelry, or other valuable possession.
Collateral Requirements
The biggest hurdle for taking out a collateral loan is that, of course, you must have a valuable piece of collateral. Many different items can be used as collateral: high-end watches, fine diamond jewelry, sports cars, boats, real estate, fine art, antiques, and much more. Choosing a specialized lender can help you get the best loan offer for your unique asset. A lender with expertise in your particular vertical will be able to more accurately appraise your item and likely can offer you a better deal overall.
Work With Our Trusted Team at AMETA Finance Group
If you are ready to move ahead with a collateral loan, consider working with our trusted team at AMETA Finance Group. We specialize in luxury watch and jewelry loans and work with Avi & Co., Manhattan’s elite jewelry and watch retailer, to offer a faster and more accurate appraisal process than anyone else on the market today. We cannot wait to help you open up new doors in your financial story.
Whether you are looking to leverage a diamond ring or borrow against a limited edition Rolex AMETA Finance Group is the place to turn for reliable and reputable collateral loans.
Reach out to our team today to kick off your asset loan journey.
