What Types of Loans Need Collateral?
For many Filipinos, loans are essential financial tools for achieving [...]
For many Filipinos, loans are essential financial tools for achieving personal, family, and business goals. Whether you want to buy a house, purchase a vehicle, or expand your business, loans provide the necessary funding. However, certain types of loans come with a requirement: collateral. Understanding which loans require collateral and why can help borrowers better prepare when applying for financing.
Collateral serves as a security measure for lenders. When you apply for a secured loan, the lender will require you to pledge an asset of value—such as property, a vehicle, or equipment—that they can claim if you fail to repay the loan. This reduces the lender’s risk and allows them to offer lower interest rates and larger loan amounts. Below, we’ll discuss the different types of loans that typically require collateral and how they work.
Housing Loans
Housing loans, also called home loans or mortgage loans, are one of the most common types of loans that require collateral. When you borrow money to purchase a house or condominium unit, the property itself serves as collateral.
Why Collateral is Required
Because housing loans involve large amounts and long repayment periods, lenders require strong security to protect themselves in case the borrower defaults.
Common Collateral
- House and lot
- Condominium unit
- Residential land
If the borrower fails to make payments, the lender can foreclose on the property, meaning they will take ownership of it and sell it to recover the outstanding balance.
Car Loans
A car loan helps borrowers purchase vehicles, and the car itself serves as collateral. In the Philippines, car loans are popular because they allow Filipinos to afford vehicles through manageable monthly payments.
Why Collateral is Required
Cars are valuable assets, but they depreciate over time. To mitigate their risk, lenders hold the vehicle title until the loan is fully repaid.
Common Collateral
- Brand-new or secondhand car
- Motorcycle
- Van or truck
If the borrower defaults, the lender can repossess the vehicle and sell it to recover the unpaid balance.
Motorcycle Loans
Similar to car loans, motorcycle loans use the motorcycle being financed as collateral. These loans are particularly popular among Filipinos who need affordable transportation or delivery vehicles.
Common Collateral
- Motorcycle (brand-new or secondhand)
Business Loans
Many types of business loans require collateral, especially for larger loan amounts. Business loans help entrepreneurs finance startup costs, expansion, inventory purchases, and equipment upgrades.
Why Collateral is Required
Business ventures carry higher risk, especially for new businesses with little operating history. Requiring collateral reduces the lender’s exposure to risk.
Common Collateral
- Commercial property
- Equipment and machinery
- Business inventory
- Accounts receivable (unpaid invoices)
- Vehicles
Equipment Loans
For businesses that need to purchase machinery, tools, or vehicles, equipment loans are a common financing option. The equipment itself serves as collateral.
Why Collateral is Required
Heavy equipment and machinery are significant investments, and lenders want assurance that they can recover some value if the borrower defaults.
Common Collateral
- Construction equipment
- Manufacturing machinery
- Commercial vehicles
Commercial Real Estate Loans
Commercial real estate loans are similar to housing loans, but they are intended for purchasing or improving income-generating properties like office buildings, warehouses, and retail spaces.
Why Collateral is Required
Because these loans often involve large sums of money, the commercial property itself serves as collateral.
Common Collateral
- Office buildings
- Warehouses
- Retail shops
- Apartment complexes
Agricultural Loans
In rural areas, some lenders offer agricultural loans to help farmers purchase equipment, seeds, livestock, or land. These loans may require collateral to secure funding.
Common Collateral
- Farmland
- Tractors and equipment
- Livestock
Secured Personal Loans
Not all personal loans require collateral, but some lenders offer secured personal loans for borrowers who want to qualify for larger amounts or lower interest rates.
Common Collateral
- Real estate property
- Jewelry
- Investment accounts
- Vehicles
Pawn Loans
While not typically considered formal bank loans, pawn loans are a popular form of secured financing in the Philippines. Borrowers pledge valuable items, such as jewelry, gadgets, or designer bags, in exchange for a short-term loan.
Common Collateral
- Gold jewelry
- Luxury watches
- Gadgets and electronics
If the borrower fails to repay, the pawnshop has the right to sell the pledged item.
Loans Using Investments as Collateral
Some banks offer loans secured by investment accounts such as stocks, bonds, or mutual funds.
Common Collateral
- Stock portfolios
- Mutual funds
- Fixed deposits
These loans can be useful for individuals who need liquidity but don’t want to sell their investments.
Advantages of Loans with Collateral
- Lower Interest Rates: Since the lender’s risk is reduced, secured loans often come with lower interest rates.
- Higher Loan Amounts: Lenders are more willing to approve larger loans when they are backed by valuable collateral.
- Flexible Repayment Terms: Secured loans may offer longer repayment periods, making monthly payments more affordable.
Disadvantages of Loans with Collateral
- Risk of Asset Loss: If you default, the lender has the legal right to seize and sell your asset.
- Longer Processing Times: Assessing and appraising collateral adds time to the loan approval process.
- Limited Flexibility: Some collateralized loans can only be used for specific purposes, such as purchasing a home or vehicle.
Final Thoughts
Collateral is an essential part of many loan products offered to Filipinos. Whether you’re buying a car, starting a business, or securing funding for your farm, collateral-backed loans provide access to larger amounts and better terms. However, pledging valuable assets also comes with risk, so borrowers must carefully assess their ability to repay before applying.
To learn more about loan options that require collateral and find out which type best suits your needs, visit your nearest Robinsons Bank branch or consult with a loan officer today.
