Collateral is that magic word that often means, “you get the loan.” If the bank perceives that you have assets worth the amount of your loan, they will almost always grant the loan unless they question their ability to market your possession on a timely basis. Even then, if you put up collateral worth significantly more than the note against it, most banks will take that risk feeling that you have the most to lose.
They know an asset worth a lot more than the loan can usually be sold quickly at a deep discount. This way they get their money. They don’t really care if you get any extra or not. This happens with cars and houses all of the time. If they can get you to put up two, it’s better.
Banks charge interest according to the estimated risk of the loan. A heavily secured loan will often receive an interest rate at or below current prime rates. This is why a lot of home equity loans are offered at good rates. You are borrowing less than 50% of the equity in the house. For the bank, it’s almost a sure thing if your credit history is good.
Most states have laws regulating the amount that a bank can charge if you borrow your own money. You do this when you put a CD or savings account up for collateral. The bank knows that you can’t get your money until they get theirs. Because of this they can usually on charge you 2 or 3 percent more for the loan than you are receiving in your account.
This may seem silly at first glance. If you want to buy a $10,000 car and make payments, you can put up your $25,000 CD as collateral. You continue to draw against your CD without taking a hit for early withdrawal. By making payments on the loan, you can retire the loan with an extremely low interest cost because you are getting interest on your CD. If you compare this to the 5% to 20% you might pay on a used car loan, it’s a great deal for you. At the end, you have your car and your money.