La Jolla Collateral Loans: Jewelry, Watches & Diamonds

Understanding Collateral Loans

A collateral loan is a loan that is secured by some asset you own. If you cannot repay the loan, you promise to surrender the asset to the San Diego lender. By using a collateral loan, the lender takes less risk than with an unsecured loan, and it is generally easier for the borrower to obtain the loan at a reasonable interest rate.

Buying a New Home or Car

The most common types of collateral loans are auto and home loans. In these cases, the collateral is actually the asset you are financing. San Diego banks may lend you money to buy the car or home, with the promise that if you cannot repay, you will surrender the asset. If you fall behind on your home mortgage, the bank forecloses and takes ownership of the property, or in the case of cars, they repossess them. The bank can then sell the asset to recover their money. This type of guarantee secures the loan for the bank in the event that the borrower cannot repay.

This Old House

Many other assets can used to secure a collateral loan (though not all banks accept all applicants). If you already own your La Jolla home outright, you typically can use it as a pledged asset to secure a loan for things like home improvements, debt consolidation, or starting a business. And even if you still have a mortgage, your real estate can often be used as collateral.

If your house in La Jolla has increased in value since you began making mortgage payments, you have established equity, or the difference between what you owe and the current market value of the house. Equity is the amount an owner would receive after selling a property and paying off the mortgage, and it is an asset often used as collateral.

Cash Accounts

When you take out a cash-secured loan, you are using your own savings as collateral. Since you will have to pay interest on the loan, it may seem counter intuitive: Why would I pay interest if I already have the cash? These types of collateral loans are often used to boost credit ratings, and are normally tied to certificates of deposit or savings accounts.

You have to get the loan from the same San Diego bank that holds your CD or savings account so that the bank can place a freeze on that account. While the freeze prohibits you from accessing the funds in your account until the loan is paid off, you will still accrue interest on the account. And because there is no real risk for the bank, these types of secure loans are often priced below the prime rate.

Banks in La Jolla don’t typically check your credit score before issuing cash secured loans, but they do report cash-secured loan payments to the credit bureaus, making these types of loans a tool for rebuilding credit. This way can get the money you need without having to wipe out your bank account.

Because banks don’t make a lot of money on cash secured loans, loan terms are usually limited to five to ten years. This means that the payments will be higher than on a long-term loan, and some banks will not let you pay off the loan with the cash you used to secure it. And even if they do, you may have to pay a penalty for cashing in your CD before the term ends.    

Investments and Securities

Some people use investments and securities as collateral for a loan in La Jolla, so they can get the money they need today without disrupting your portfolio. As long as your investment account has sufficient eligible securities to use as collateral, this type of loan may be easier to obtain and be offered at a lower interest rate. These loans often feature no set up or cancellation fees, and often can give you the ability to borrow between 50% and 90% of your eligible assets’ value.

Securities-based borrowing has special risks. If the market value of your investment portfolio drops below required levels, you may be forced to pay down your debt, offer additional securities for collateral, or even sell some of the pledged assets. The sale of these pledged assets may also have adverse tax consequences, so careful consideration of all the consequences should be made before taking out this type of secured loan.

Future Payments

Another asset that is sometimes used as collateral is future payments. Anything that can be seen as potential future earnings can be used. These can be in the form of accounts receivable or purchase orders in the case of a business in La Jolla. As the borrower, a purchase order issued to you represents future sales on your part and can secure the loan. Another source of future payments could be loans or promissory notes you have made to other people.

Life Insurance Policies

Life insurance policies often can be used as collateral by assigning the death benefit to the lender. A simple contract is drawn up, naming the lender as the primary beneficiary in the event that the owner of the policy dies before final repayment is made on the loan.

The contract is between the policy owner and the lender. The insurance company remains a disinterested party in the assignment arrangements, except for its obligation to execute the terms of the contract. If the policy’s death benefit is greater than the dollar amount of the collateral assignment, remaining proceeds are distributed to the original beneficiaries.

**Please note that these are just general definitions of collateral loans. The banking industry is always changing. So, do talk with your bank or lender about their practices and what option is best for you.