Building collateral – ways to improve your borrowing potential

September 25th, 2008 by admin | Filed under Money Management, Mortgages, Saving, UK Bank Accounts.

If you are looking for ways to improve your chances of receiving a loan, the best option is to build your collateral in order to show the lender that you have a strong financial history and are a dedicated to repaying the loan.

In banking terms, collateral is used to indicate assets that secure a debt obligation. In the case of a house mortgage, for example, the house serves as the collateral for the mortgage loan. This way, the bank is completely secured against the risk of the borrower not being able to meet the interest payments – if you cannot make the payments, the bank will seize your home.

There are two different types of collateral that banks will consider. The first type of collateral is secured lending, otherwise known as asset-based lending. The other type of collateral refers to more ‘liquid’ assets such as cash or securities, often known as ‘margin’.

Depending on the needs of your lender, having a strong amount of collateral will likely help you secure a loan more easily, and may even allow you to negotiate lower interest rates.

One of the best ways to improve your collateral is to start making smart investments. These don’t have to be large; you can start small and build yourself up over time. In fact, most people build their collateral using the loan system – they use small loans to make smart investments and eventually they have a large amount of collateral to their name.

Easy Ways to Improve Your Image without Collateral

You don’t have to buy a home to improve your image in the eyes of a lender. Here are some simple ways to improve your financial image:

Make bill payments on-time: avoid trying to wait until the last possible minute to pay your bills. Get on-top of the bill payment situation – and pay your bill as soon as it arrives in the mail
Avoid maxing out your credit card: interest rates and payments can become very difficult to manage and can become easily out of control. Try to make more than the minimum payments each month
You don’t have to carry a credit card balance: one of the many myths of building collateral is that you need a credit card balance. In fact, many credit scores don’t distinguish the fact if you carry a credit card or not
Open a checking or savings account: although not critical, many lenders will look at your credit history and look favourably on the fact that you represent stability
Obtain a secured credit card: these cards allow you to make a deposit with a lender – and the amount usually becomes your credit limit. The issuer takes on very little risk because if you don’t pay on time, it can go into your account to cover the bill
Use a co-signer if possible: If it is feasible to obtain a co-signer for your first few credit accounts. In these circumstances the credit rating of the co-signer will be added to your own
Make smart financial decisions: Make sure your credit is in place before you make large purchases

Building collateral is one of the most important things you can do in order to obtain a healthy financial situation. Start today, as the process does take time. However, the rewards for having good credit will far outweigh the problems associated with having no collateral.