What is an Asset-Based Loan?

Asset based loans are extended based on collateral placed with the lender. They are a type of secured loan popular because they are often easier to achieve and less expensive than unsecured loans. Even borrowers with bad credit may be able to seek a loan if the collateral is appropriate. Nearly any asset can be used in asset based lending. 

Stock-Secured Loans

Stock-secured loans are extended based on the value of a stock certificate. The original certificate is left with the lender. The lender then extends financing up to a certain amount of the stock's actual value on the market. For example, a 75% loan-to-value ratio on a stock or group of stocks worth $10,000 would yield a loan worth $7,500. Once the loan is secured, the limits will not change if the stock goes up or down. 

Savings-Secured Loans

Savings secured loans are issued against the amount a borrower has in a savings account. They are usually given by the same institution where the savings account is housed. The savings continue to earn the borrower dividends. These dividends can effectively be subtracted from the interest rate on the loan, making the total cost of financing much lower. A borrower does not need to leverage the entire amount in savings; a portion of a savings account may be used.

Certificate-Secured Loans

Certificate loans are similar to savings loans in that an amount of actual cash is placed with the lender. This amount is stored in the form of a "certificate" which then earns dividends. Again, these dividends will counteract the interest rate being charged and make the cost of financing lower. If the borrower defaults, that borrower owes the lender the full amount of the certificate.

Mortgages

Mortgages are among the most common asset-based loans. The deed to a home stays with the lender until the loan is paid off.  This essentially means that the lender owns the home until that time. If the home is sold prior to the borrower paying off the mortgage, which is fairly common, the borrower can use the sale price to pay off the mortgage early and take whatever cash is left over in profit. Homes can also be used as an asset for a home equity line of credit or second mortgage. These loans are extended once a person has built up some equity in the home and would like to monetize it to secure more financing. 

Car Loans

Car loans are often the first type of asset based loans a person will engage in. Car lenders, like mortgage lenders, keep the title to the car until the loan is paid off. The person is free to use the car as if he or she owns it, but does not receive the title in full until the loan is paid off. Car loans are not just given by banks and lenders. Many car manufacturers have their own finance companies to fund the purchase of their vehicles. General Motors Acceptance Corp. started as a car loan company and has grown to a global financial service leader.