Traditional unsecured loans are the most common and least costly form of borrowing known to most people. So, when they need money to fulfill various financial obligations, going to a bank or traditional lending institution is often the first option that comes to mind. However, when it comes to securing short-term financing to meet your needs, several other options are available.

Since choosing the right type of lending is critical to your overall experience and chances of meeting your needs, comparing the available options is an important aspect of the decision-making process.

An asset-based loan is a lesser-known but equally efficient way to get money to meet your urgent needs. This collateral-based loan has been gaining widespread popularity in recent years, especially with people who own luxury assets that can be used as security for this loan. In this article, we will compare these two lending options, weighing their pros and cons to determine your better choice.

What is an Asset-Based Loan?

An asset-based loan is a type of loan you obtain by putting up a property you own as a security for the loan to guarantee the lender that you will pay back at the agreed-upon period. High-value possessions such as cars and real estate are the most commonly accepted properties for this type of loan. However, many asset-based lenders now accept luxury items like expensive watches as well. For instance, New York-based lending company AMETA gives clients asset-based loans with Luxury watches as collateral.

An asset-based loan is an excellent option for individuals with high-value possessions who need liquid cash to meet their immediate needs. With this type of loan, the exact amount of money you’ll get depends on the market value of the property used as collateral.

The lender typically holds on to the collateral throughout the loan duration. The loan agreement also gives them the right to retain the collateral permanently if they fail to repay the loan based on the agreed term.

What Is Traditional Lending?

Traditional lending is a more familiar form of lending. This type of loan does not require the borrower to use an asset as collateral for the loan. Instead, the lender evaluates the borrower’s ability to repay the loan to determine whether or not they should get the loan.

This ability to repay the loan is expressed in the form of creditworthiness which is based on factors such as the borrower’s past financial performance, income, debt-to-income ratio, and credit score. These factors are used to calculate how much the borrower can feasibly pay off, determining how much they can get as a loan.

It’s a more complex process compared to the asset-based option. But traditional loans work great for individuals with great credit but no valuable asset to use as collateral. They tend to be more difficult to obtain, thanks to the technicalities and longer approval process. On the flip side, this type of loan tends to have more favorable terms than the collateral-based option.

Pros and Cons of Asset-based Loans

Asset-based lending has several benefits especially when compared to traditional lending. Of course, the biggest of these is its flexibility and convenience. However, it does have a few downsides and limitations. These pros and cons are highlighted below:

Pros

Speed

Asset-backed loans are secured by tangible assets. The lender only needs to authenticate the asset in question and determine its value to approve the loan request. This process can be completed in just a few days after the loan is disbursed. The speed of approval makes it easy for borrowers to get the funds they need, which is crucial in times of financial urgency.

Ease of approval

Not only are asset-backed loans approved quickly, they’re also easier to get. Since the loan depends on the quality of the collateral, there are fewer forms to fill and requirements to meet compared to traditional lending.

Potential for Bigger Loans

How much an applicant can get with this type of loan depends on the current market value of the collateral. This means an individual may be able to obtain a larger loan amount than they would have normally gotten with traditional lending.

No Credit Requirements

Loans backed by assets do not depend on the applicant’s credit score. Unlike traditional lending, the focus is on the value of their asset and not on their credit history. This type of loan works great for those with poor or complex credit histories and those who do not want the loan application to affect their credit rating.

Asset Retention

Obtaining an asset-backed loan allows you to retain ownership of your asset while still getting the needed capital. This is a better alternative to selling the asset completely. You can recover your asset once the loan (and any associated interest) is paid off.

Cons

High Interest Rates

The interest rate on collateral-based loans may be lower than other alternative financing options. However, it is still higher than the rate banks and other traditional institutions offer. Additionally, this type of loan may have other fees associated with it. For instance, when luxury assets like watches are used as collateral, they must be shipped, insured, and stored in secure vaults. These costs may be added as extra costs in the loan offer.

Limited Collateral Options

Lenders offering asset-based loans often place limits on the type of asset they accept as collateral for loans. For instance, AMETA Finance Group focuses exclusively on luxury watches as collateral. And even with loans on watches, there’s a limited list of high-end watches that qualify as collateral.

Possibility of Losing the Asset

With asset-backed loans, there’s a small, but real risk of losing your asset if you default on the loan terms. Missing payments for four months or more may result in the seizure of the asset after which it will be sold to recover the investment.

Who Should Get a Collateral-Based Loan?

Considering the pros and cons of collateral-based loans, they may be better suited for certain types of borrowers. This type of loan may be a good idea for you if you fall into any of these categories:

• You need quick, short-term capital

• Borrowers who own valuable assets but have limited, complicated, or poor credit history.\

• Individuals who need larger loan amounts than their credit can get them

• You have an asset that is currently not being used.

Pros and Cons of Traditional Lending

A traditional bank loan may be inflexible and difficult to obtain, but it still has a few notable benefits. These pros and cons are highlighted below:

Pros

Lower interest rate

As mentioned above, traditional lenders offer borrowers lower interest rates than the alternatives. These loans are less risky for the lenders, so they can offer friendly terms to borrowers with great credit scores.

Regulated lenders

The traditional lending industry is well-regulated. Banks and credit unions have a reputation that can be trusted, giving borrowers greater peace of mind compared to alternative loan providers.

Multiple loan options

Traditional lenders offer a wider range of loan products for borrowers. These loans vary regarding their requirements, terms, repayment periods, and other factors. This gives borrowers more flexibility to choose the most suitable offer for their needs.

Cons

Stringent Credit Requirements

Traditional loans are based on the creditworthiness of the loan applicants. This means high-value borrowers with no credit history (or less-than-perfect credit) will still have a hard time obtaining this type of loan.

Lengthy Process

The process of lending from a traditional bank or credit institution is lengthy. It involves a lot of documentation to determine the applicant’s credit status and financial performance. This makes it unsuitable for borrowers with urgent financial needs.

No Flexibility

Traditional credit providers are typically rigid in their terms. Interest rates and other repayment terms are often fixed. This can make it difficult for the borrower to adjust in case of any changes to their financial situation.

Who Should Get a Traditional Loan?

Considering the formal and lengthy application process, stricter eligibility requirements, and fixed terms, traditional loans are best suited for the following groups of individuals:

• Borrowers with excellent credit and can meet stringent documentation requirements.

• People with no high-value asset to use as collateral

• Individuals who prefer loans with predictable loan terms

• Applicants with no urgent financial needs.

Conclusion

Asset-based and traditional lending options are both great depending on your unique situation. In certain instances (urgent needs, or complex credit situations), a collateral-based loan is simply the only viable option especially when you have high-value assets to get the required loan amount. However, applicants with great credit situations who do not mind the tedious process of borrowing from traditional borrowers may enjoy the lower interest rate and other benefits of the traditional option.