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Home Insights & Advice What can be used as collateral?

What can be used as collateral?

by John Saunders
14th Oct 20 11:15 am

Investments are all about maximizing profit margins. No matter the cash value of a sale, if you only manage to eke out a tiny profit then the deal may not have been worth the effort. Maximizing your return on investments comes in many forms. One of these is the utilization of collateral to secure favorable terms on borrowed money.

What is collateral?

Collateral is essentially assets put up to backstop your ability to pay off a loan. Many home buyers are economically unsafe bets for lenders because they don’t have a long work history, don’t own property already, or haven’t amassed a significant savings portfolio. In the United States, the average first time home buyer is 33 years old. This age is rising, but it still falls within a younger demographic that hasn’t built up the same decades-long credit history or property equity that their parents’ generation possesses. As such, collateral in the form of cars, gold, or rare collections becomes an significant asset in securing a personal loan or significantly reducing the interest rate.

For buyers of property — real estate or otherwise — an unsecured loan is always a great option, as it requires no risk on your part. However, putting up collateral is essentially making the promise that if you fail to pay, you are giving up that valuable object in lieu of payment. If you can make the payments, you don’t have anything to worry about, and collateral can allow you to reduce interest and therefore your overall debt to the lender over the lifetime of the loan.

The stock market is the investor’s classroom

Stock trading is the bread and butter of many investors. A healthy combination of tech and materials firms, the infusion of stability with index funds, and rebalancing on a quarterly basis will often net the considerate investor a favorable profit. But there is a ceiling to stock trading. The market makes an annualized average of around 9% over the ten year period, and the vast majority of investors can’t beat it in the long term. This means that much of the market’s power is vested in a buy and hold strategy. Stocks are your first port of call, it’s definitely the best way to learn commodity trading and the unfair advantage that compound interest can provide you moving into the future. But this should not be where you stop, because stocks are not eligible for leveraging through the staking of collateral.

Consider investing in gold and silver

Precious metals are a great move for newly minted stock traders. Building up a store of gold, silver, or platinum can give you leveraged power when it comes to taking out loans. This is because they are physical assets that can be handed over or sold for real value currency. Many bullion metals are forged as currency themselves, and so you can trade them without paying capital gains taxes as well.

Invest in classic vehicles

Cars make good options for collateral as well. Many home buyers own at least one vehicle, and can therefore leverage their ownership in order to secure favorable loan terms without additional paperwork or steps. Remember, however, that unlike gold, your car is your means of transportation, so losing it because of your inability to pay on the loan might mean the loss of your job as well. Carefully considering what to put up in support of your application is essential for this reason.

Financial institutions are often willing to take rare sports memorabilia, rare artwork, or other valuables (like a collection of vintage Gibson guitars) as collateral in a secured loan arrangement. That being said, these alternatives to the traditional financial vehicles may take longer in appraisals and net a lower value addition to your application than they are actually worth. Essentially, any valuable personal assets can be used to supplement lending, but taking care when approaching this inclusion is always necessary.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.

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