5 Recommended Uses for an Asset-Based Loan

An asset based loan is secured against collateral in order to make the interest rate lower. Essentially any asset with a given value can be used as collateral such as a car, home, stock or even a savings account. The borrower places ownership of the asset temporarily with the lender, then reclaims the asset when the loan is paid off. This type of loan allows the borrower to assume a portion of the risk. 

Student Loan

Most student loans are unsecured because they are taken out by young people without a large asset base. However, particularly with graduate student loans, a person may capitalize by opting for asset based financing to fund a degree. Graduate students who have worked for a number of years may have savings, investments and other assets. The loan will have a lower interest rate in most cases, meaning the student will have to pay back much less to the borrower once he or she graduates. 

Car Loan

A car loan is often the first type of asset based loan a borrower will ever seek. When you use dealer financing, you are arranging for an asset based loan. You leave the vehicle title with the financing corporation until the time the loan is paid off, and then you own the vehicle officially. Your car can also be used as collateral for other types of loans, though the most common use of a car as collateral is for the car loan itself.

Mortgage Loan

Most mortgage loans are asset-backed because the deed to the home remains with the lender until the loan is paid off. Once you have built up some equity in your home, you can also use your home to seek a home equity line of credit or home equity loan. These loans are usually used to make improvements to the home itself, but the money may be spent as the borrower sees fit. 

Small Business Loan

You can use your home, car or other asset to finance either the start up or expansion of a small business. When you first apply for a small business loan, your personal financial profile and collateral will be important in determining the terms of the loan. Once the business is established, the business itself will have a credit history and assets you can use to finance expansion. 

Personal Loan

Personal loans can be used for any purpose ranging from paying medical bills to paying for a wedding. Personal loans tend to be among the most expensive to take out because they are not often secured against an asset. However, smart borrowers will consider securing the loan in order to bring down the interest rate and make the terms more favorable. Any asset may be used to finance these loans. It is important to understand the inherent risk in using collateral for a personal loan, though, and to seek personal loans wisely. Financing a lot of personal expenses will result in a high amount of debt, and your assets will be seized if you default on secured debt.