Collateral is a word in the financial lexicon that’s always greeted with a mixture of fear and suspicion. After the 2002 Arnold Schwarzenegger flop, “Collateral Damage”, the word has not been seen in any kind of light other than negative. Whether it’s because of the nature of the collateral or because of the movie is unclear.
Collateral is an important part of financing because it gives the lender security that the borrowers are not going to disappear. It also keeps lenders from driving up the credit every time the borrower does not repay. In essence, it is a fair exchange between the involved parties and serves as a positive tool for people with bad credit.
Bankers and investors are averse to approving loans to people who have a less than positive credit history. That’s understandable; after all, wouldn’t you think twice, thrice, ten times before lending money to somebody who’s proven to fail on paying back? But the chip of collateral will provide lenders with the appropriate peace of mind in giving someone a bad credit secured loan.
The only reason that people seem to fear the word as much as they do may be due to the possibility that they know they can’t pay the loan. This kind of thinking is defeatist and symptomatic of a person who shouldn’t be trying to apply for a loan in the first place. The definition of a loan isn’t free money, it is money that helps you get the things you want sooner, and you still have to pay for it.
A good rule of thumb is, if you’re not confident that you can pay for something five or ten years from now in a normal purchase, you shouldn’t look to get it now through a loan. Only people who are down and out can ignore this, because they’re the ones who really need help.
Fortunately, there are lender programs that cater specifically to people who are trying to dig themselves out of a hole. But these programs are a stepladder, not a crutch; people still need to depend on themselves to make their lives better and the loan just gives them a fair shot. Collateral still plays deeply into these programs, but the terms are more relaxed than normal loans.
Collateral is good thing, it is a bargaining chip that helps borrowers get what they want. It’s still a big gamble on the part of the lender, and a borrower can even use collateral as a motivator to clear all their debts.