What Is Collateralization, And When Would I Need It?
Types of debt fall broadly into two categories: secured and unsecured. Secured debt involves any loan that is guaranteed by an asset pledged by the borrower in a process known as collateralization. Should the borrower fail to pay back the loan, the lender can seize the asset and sell it to recuperate any loan losses.
Keep reading to take a closer look at the process of collateralization as well as some alternative options.
How It Works
As explained above, when a borrower takes out a secured loan that they must guarantee with an asset, this process is known as collateralization. If the borrower defaults on their loan, the lender will repossess the asset and sell it to cover the remaining unpaid balance on the loan.
The most common examples of this involve home and car loans, in which the house and vehicle act as collateral. Collateral-backed loans are very common in the business sector, where stocks, bonds, machinery, and equipment may be used to secure financing.
Typically, a lender is willing to offer between 70% - 90% of the collateral value in the form of financing. This ensures the creditor will not suffer a loss in the event of debtor default. It is important to note that collateralized loans are not subject to dismissal under a Chapter 7 bankruptcy filing; the lender will end up taking ownership of whatever item was used to secure the loan.
Examples Of Collateralization For Medical Loans
- Home Equity Line Of Credit: Equity refers to how much of one’s mortgage they have paid off; it is the stake of ownership an individual has in their home. Anyone needing to pay for costly medical bills can take out a loan using their home equity as collateral.
- Secured Medical Loan: Some lenders offer secured debt vehicles marketed specifically to pay for medical expenses, such as Discover medical loans and LendingPoint loans. Just like any other secured loan, some asset is required to guarantee the loan.
- Secured Personal Loan/Line Of Credit: Unlike secured medical loans, secured personal loans and lines of credit can be used for any type of expense. These types of loans are typically pursued by individuals with a credit rating of 620 or lower who do not qualify for conventional unsecured loans.
Secured medical loans are not for everybody. Some people do not own an asset with sufficient value to guarantee a loan. Others are simply not comfortable with the fact that they could potentially lose their pledged asset should they default.
Luckily, there are some alternatives that anyone in this situation can explore.
Many medical service providers offer payment plans to their patients. This option may only be available to individuals with a high credit score and usually requires a significant downpayment. In some cases, an interest-free payment plan can be negotiated at a clinic or hospital.
Medical Credit Cards
Medical credit cards function similarly to normal credit cards; they incur a balance and the borrower needs to make at least the minimum payment every month to keep the account in good standing. Medical credit cards are often issued by the service provider itself, and can only be used to pay for services provided by the card issuer. Medical credit cards carry higher interest rates than secured medical loans.
Online lenders offer faster approval and deposit times than traditional brick and mortar lending institutions. They are also more willing to work with people who have a lower than average credit rating. Eloan’s bad credit loan offers are a good example of where to find financing with a weaker credit history. This may be a last resort option for individuals who do not own appropriate assets to secure a loan and need fast access to cash to pay for medical expenses.
Collateralization is the process whereby a borrower puts up an asset to secure a loan. Should they default on the loan, the lender is legally entitled to take ownership of the pledged asset. This process is important to understand in the context of secured medical loans since one may not know how secure their financial future may be in the face of medical issues.