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Pros and Cons of Collateral Loans

Though using a collateral loan can be an effective way to borrow money, some risks don’t exist with other types of loans. The major advantages of a collateral loan are:

On the other hand, there are some disadvantages to collateral loans:

Adham Sbeih, CEO and founding partner of Socotra Capital, a real estate lending and investment firm based in Sacramento, California, also says you should look out for prepayment penalties, which are fees charged by the lender if you want to pay off the loan before the term is up. “Make sure you have an exit strategy,” he says, since these loans are not intended to be a permanent solution to cash flow issues. You should have a specific goal for your collateral loan, as well as a plan to pay it off.