Choosing Collateral to Lower Interest Rates

When you're applying for a loan or you're trying to renegotiate the terms on a high interest debt, securing the loan with collateral may help you qualify for lower interest rates. Collateral is property that is pledged to a lender as security for a loan. If the borrower is unable to pay off the debt, the lender may seize the property as payment. Any property that you use as collateral must have enough value to compensate the lender for all or part of the value of the debt if you are unable to pay.

Credit card bills, medical loans and student loans are examples of unsecured debt. With unsecured debt, interest rates are higher because the lender assumes more risk. If a financial institution agrees to issue you an unsecured loan, interest rates will be based on your current income, your credit history, the amount of money you're borrowing and the lender's standard rates. With a secured loan, the value of your property is also taken into consideration when determining interest rates during your loan consolidation application process.

Types of Collateral

A house, car, boat, trailer or an expensive piece of machinery may be used as collateral to secure lower interest rates. When you take out a loan to buy a house or a car, the property itself is the collateral. Financial assets such as stocks or bonds may be used as collateral, as well. When you're choosing collateral to lower interest rates, consider the potential financial impact on you and your family if you were forced to default on the loan. If your well being would be severely affected by the loss of the property, consider another type of collateral or another loan.

A house is one of the most valuable financial assets that a consumer can own. Because of its high value, a home is often used as collateral. Home equity loans or second mortgages offer low interest rates based on the value of the property. The interest rate for a home equity loan will typically be lower than the rate for any unsecured loan, especially if the borrower has a poor credit history.

Many homeowners use their equity, or the percentage of the property that they've paid for plus the amount of the home's appreciation, to secure a low interest loan. The financing from a home equity loan can be used to consolidate high interest debts or make improvements in the property. However, using a home as collateral can be a risky step. If you are unable to pay back the money that you've borrowed, you may lose your house.

Alternatives to Property as Collateral

If you've built up a large amount of unsecured debt but you don't have any collateral to reduce your interest rates, your credit rating may suffer. Many consumers caught in the cycle of taking on more high interest debt in order to pay off loans or credit cards. If you're stuck in this situation, a credit counseling agency may be able to help you lower your interest rates by requesting lower monthly payments or a deferment.

If you are looking for a way to repair your credit with a low interest loan, but you don't have any collateral to offer as security, consider a secured credit card. A secured credit card uses the borrower's own money as a form of collateral. The funds that you borrow from a secured card are drawn from money that you've paid into the account. Secured cards help consumers with damaged credit gradually restore their credit rating and one day you may have the option to lower interest rates with collateral.