When you need cash to meet an urgent need, but a traditional loan isn’t an option, an asset-backed loan is a great alternative. Also known as a collateral or asset-based loan, this type allows borrowers to use an asset they own as security. The asset’s value is used as leverage, providing short-term capital when you need it while still retaining ownership of the asset. 

An asset-backed loan is a good financing solution for individuals needing short-term capital as long as they have eligible valuable assets. However, like every type of loan, it is important to understand what asset-backed lending entails before agreeing with a lender. In this post, we will explore some of the most important things to know about asset-backed loans before you go for this loan option.

It Doesn’t Depend on your Credit Score

An asset-backed loan is processed quickly (typically within 24 to 48 hours) and has high approval rates. The main reason is that this type of loan does not require any credit check. 

Unlike traditional loans, where the lender has to dig into your finances to determine your creditworthiness, an asset-backed loan is based on the value of the asset you’re presenting as collateral. All the lender needs to do is authenticate the asset you’re borrowing against and determine its value. Once this is done, you will get an offer based on the asset’s market value, and the loan will be transferred upon signing the agreement.  

You Get to Retain Ownership 

Asset-based lending is an efficient way to get the cash you need to meet your urgent needs without selling your assets. The lender gives you the capital you need based on the asset’s value, but you get to retain full ownership. 

For some assets (such as real estate or cars), you can still use the asset throughout the loan duration. However, in the case of smaller assets such as a luxury watch or bag, the lender may hold the asset in safekeeping until the loan is repaid. In this case, the luxury asset is shipped to the lender and stored in a secure vault. The asset will be returned after the loan and any associated interest are repaid. 

Eligible Assets 

Before applying for an asset-backed loan, you should know that not all valuable assets will qualify as collateral. Traditionally, collateral loan providers accept high-value assets such as real estate and cars as security for loans. However, recently, we have seen an incursion of new loan providers that accept luxury items such as high-end watches as collateral for short-term capital. 

For instance, AMETA Finance Group provides clients with loans on watches. This means you can use high-value watches from luxury brands like Patek Philippe, Richard Mille, Omega, Cartier, and Audemars Piguet as collateral for your loan. 

Although luxury lending with watches as collateral isn’t as popular as other asset-based loans, this type of loan is gradually gaining popularity. Companies like AMETA give clients short-term capital of up to $5,000,000 with favorable terms and conditions. 

Loan Amount Depends on the Value of the Asset 

The value of your asset determines the loan amount you can get from the loan financer. Before approving the loan and sending in the loan offer, the lender evaluates the asset’s value based on its current condition and market demand. Lenders may follow specific rules or formulas to determine the loan amount a person gets. 

The ratio of the loan amount to the value of the collateral is known as the Loan-to-Value (LTV) ratio. The exact LTV ratio depends on the type of asset, its liquidity, and the lender’s risk assessment. Generally, you can expect to receive less than the full market value of your valuables. While it varies from one lender to the other, you should get between 60% and 90% of the asset’s value as your loan amount. 

Lenders may also consider the asset’s market demand to calculate the loan amount, interest, and other loan terms. Generally, lenders prefer collaterals in high demand because they can be converted to cash more easily if the borrower fails to repay the loan. 

With AMETA’s luxury watch loans, for instance, the eligible brands are grouped into two tiers. The most popular brands, such as Audemars Piguet, FP Journe, Patek Philippe, Richard Mill,e and Role,x are in tier one, while watches from brands like Breitling, Cartier, Hublot, IWC, and Omega are in tier two. 

Beyond the general reputation and popularity of the brand, the current condition of your asset is another factor that may influence the loan amount. Newer or mint condition assets are more likely to get you a bigger loan than older ones. If you’re looking to get a specific loan amount, always use an asset with commensurate value as collateral for your loan. In addition to the loan amount, the value of the asset you use as collateral will also determine the structure and repayment schedule of your loan. 

There are Other Costs Involved.

Just like other loan options, an asset-backed loan isn’t exactly free. The lending company is offering loans for profit, which means you can expect to pay interest on any loan you get. The total amount you’ll be expected to repay depends on the initial loan amount, interest, and other associated fees. Additional fees that may apply to this type of loan include: 

• Appraisal fees   
• Origination or arrangement fees 
• Legal fees
• Storage or insurance fees (if the lender takes physical possession of the asset).
• Monitoring or servicing fees 

Some lenders may also charge a prepayment penalty if the client decides to pay off the loan earlier than the agreed date. However, a few lending companies waive this fee. 

Knowing the cost of getting a collateral loan can help you compare different loan options to choose the most suitable one. Generally, asset-backed loans are easier to obtain, but lenders charge a higher interest rate than traditional loans backed by the borrower’s credit. 

The interest rates and associated costs can also help you choose between different lenders. Before settling for a specific lender, ensure you fully understand the total cost of obtaining a loan with them. You may also compare the offer with offers from others to make an informed decision. 

Know what Happens if you Fail to Repay the Loan. 

The major risk involved in putting up an important asset as collateral for a loan is that you might lose the asset if you fail to pay back the loan and interest at the agreed time. You should strictly adhere to the repayment terms of your loan to receive your asset back. 

An asset-backed loan enters a default status if you fail to make payments after four months. If this happens, the loan provider is allowed by law to initiate a foreclosure process for the asset. This means the loan provider can put the asset up for sale to recover their investment in the loan. 

The only upside here is that the loan status may not impact your credit score, so it won’t affect your chances of getting future loans. The asset is the only thing you’re risking with this type of financing. 

As explained above, collateral loan providers will not check your credit to determine your loan offer. It is up to you to determine if this kind of loan is suitable for you based on your financial situation. You must assess your ability to repay the loan promptly, considering factors like income, expenses, and potential financial changes. More importantly, consider the long-term impact of losing your collateral. 

Conclusion 

A collateral loan is generally more straightforward compared to many other credit options. The most important thing to know is that the lending company will evaluate the value of your asset, which will be used to calculate the loan amount and other terms of the deal. Whether this type of loan is right depends on your financial situation, how much you need, and the eligible assets you have in your possession.