Microloans vs Collateral Loans – Which is better for me?
Many banks aren’t lending money to smaller businesses like they used to do. As a result, many entrepreneurs and small business owners are turning to alternative lending options, such as microloans and collateral loans.
What are Collateral Loans?
Collateral loans require borrowers to provide property or other assets – like gold, jewelry or silverware – for a short-term loan. Consumers can apply for this loan in-person at a pawn shop, or via an online application. In exchange for this loan, the borrower agrees that the lender can retrieve the item if they don’t repay the loan.
Lenders typically offer less than the value of an asset, and quote an acceptable “Loan to Value” ratio (LTV). For example, let’s say you borrow against your watch that’s worth $1,000. If the lender allows an LTV up to 80 percent, you should be able to borrow up to $800.
It’s important to note that even if the lender takes the collateral and sells it for less than the amount owed, the borrower is always responsible for the full amount of the loan.
Where do you apply for Collateral Loans?
Provident Loan Society provides collateral loans for gold, silver, diamond jewelry, gold coins, fine watches, and silverware. Their interest rate is comparable to many credit cards. As a not-for-profit, Provident Loan Society has interest rates that are generally half the rate of most pawn shops. Their handling fees are lower and they give borrowers up to six months to pay the loan off.
What are Microloans?
Microloans are exactly like they sound: small loans averaging around $13,000 in the US, according to Small Business Administration (SBA). Many banks don’t typically like to make loans for less than $250,000, making microloans an alternative for small business owners.
These types of loans are ideal for business purchases, like equipment, inventory, or even a company acquisition. In order to qualify for a microloan, the borrower must be 21 years old and the sole business owner.
Unlike banks that require high credit scores, microloans typically don’t weigh credit as heavily. They look at other strengths on the application, such as professional experience, a business plan, or proof that a business will impact the community.
Where do you apply for Microloans?
Business owners can apply for a microloan through a number of programs. The Small Business Administration (SBA) has partnered with micro lenders throughout the United States. Other microloan options not affiliated with the SBA are Kiva, Opportunity Fund, and Accion USA.
All microloan terms vary, but generally the maximum repayment time for most microloans is 6 years with interest rates ranging between 8 percent and 13 percent.
About the Author
Claudia Despres is currently studying Marketing at St. John’s University in Queens, NY. She is a manager for the Global Loan Opportunities for Budding Entrepreneurs program at St. John’s as well as an employee for Alumni Relations.