Collateral option is preferred by the investors when the loan amount is huge. The borrower has to be in consent with the lender that he is allowed to take a part of the collateral for selling purpose in case the borrower fails to make the payment. DC Fawcett Virtual Real Estate Investing Club Usually the borrower pledges his land and the borrower can expect a reasonable amount when he applies for the loan.
The collateral is used as an assurance from the lender’s perspective. It reduces the risk as he does not lose all his money when borrower falls short on his payment. The lender has all the rights to hold the borrower’s possession when there is a payment default, the possession can be sold and the amount can be used as reciprocal for the loan.
Instead of taking legal action and to avoid lengthy procedures, the lenders just sell off whatever the borrower pledges as collateral and make money.
Not only land, there are different types of collateral which is listed below.
The valuable asset can be in any form which can be made into cash when you sell.
- Real estate
- Savings account ( the lender takes the amount that is left in your account whichever is due)
- Insurance policies
Usually the lender only sanctions a loan which is very much less than the value of the asset. There may be certain situations where you may need to add collateral when the existing collateral loses its value.
Collateral loans are usually applied by business men as well for personal use. They are the last choice when the investor has a bad credit score as these loans are expensive.
Similarly, home equity loans are preferred when the borrower is in need of huge amount. These loans are not having much strict guidelines and easy to get qualified. It is more of a second mortgage, when the first home you own has resulted in sufficient home equity. These loans are considered to be safest and you cannot come across scammers and fraudsters as these loans are provided by the bank. Know you income and expenses before applying for the loan.
The following are the benefits of home equity loans
- Rate of interest is low
- People with bad credit score can apply for these loans as getting an approval are easier.
- The investors get tax deductions
When the borrower fails to repay, his house which is kept as collateral is taken by the bank and the foreclosure procedure comes into force. The risk factor should be kept in mind before applying for home equity loan. The fear of losing your property will stop you from applying the home equity loan at times.
Also the bank should not approve loans having higher amount as bank may face a financial crisis if all those borrowers default in payment. The borrower can avail two options namely HELOC and lump sum, which is more like second mortgage type. To know more about second mortgage, the uses read the blogs in DC Fawcett virtual real estate investing club.
DC Fawcett virtual real estate investing club blog will help the investors to know more about the emerging trends in commercial real estate and how to prevent from scams.