A secured loan is a loan that is attached to collateral. This type of loan will usually have a much lower interest rate due to the fact that the bank is taking on a lower amount of risk because they are able to collect collateral if you end up defaulting on payments. Using your collateral in order to secure a personal loan can be a good way of building good credit. There are several different types of secured loans, however car loans and mortgages are the most common. You may also get a secured credit card through attaching a CD to it. Here are some tips to help you use your existing assets to secure a personal loan.
Be Realistic About the Value of Your Assets
Banks are incredibly notorious for being conservative when it comes to valuing a borrower’s assets for their worthiness as collateral. This is because if the borrower ends up defaulting, the lender must then expend substantial resources in order to take that asset, locate a buyer and sell it. One of the biggest mistakes you can make is thinking that your assets are worth more than they actually are. Instead of considering what you paid for them, you should instead look at the market value as that’s what banks will take into consideration most. If you don’t know how much your assets are worth then it can be worth your time to locate an independent appraiser in order to give you a better idea of how the bank will value it.
Keep a Detailed Record of Your Assets
Besides knowing your assets’ worth, it is also very important to keep a record of your assets on a balance sheet. When a bank is looking over your documents, they’ll want to know that you paid attention to the important factors of your assets including a valuation, dates and other relevant information. All you need is a simple excel spreadsheet with a few line items in order to do this effectively.
Know What Type of Assets You Can Use
Basically, you have two types of collateral. The assets that you own completely, and the ones that you still have a loan against. If you still have a loan on an asset, for example a mortgage on your home, then the bank can recoup the loan through refinancing it from the institution from which you have the original loan, and claim the title. An asset that is viable to use as collateral will have an ownership title, and banks will only lend you money if they are able to receive the title. Cars and houses are the most common types of collateral, however you can also use motorcycles, watercraft and equipment that have title of ownership.
The Problem With Using Real Property
Since the housing crash, using property as collateral has taken a significant hit. In the past, using the equity in your home was an incredibly reliable way to gain access to a personal loan. However, nowadays homes simply don’t have that equity anymore. On top of this, banks will not consider vacant land as a viable form of collateral.
Using Deposits or Cash Savings
Cash is always a reliable way to gain a loan. Using your personal savings will be an almost guaranteed accepted form of collateral, as it’s considered low-risk to banks. The same thing applies to CDs, and other types of financial accounts. The advantage in using these accounts as collateral is that you’ll be guaranteed a low interest rate due to the fact that they’re secured. However, the disadvantage is obviously that if you default the bank will possess your savings.
Be Aware Of the Risks
Taking out a loan using your personal assets as a form of collateral comes with inherent risks. Namely, losing that asset in the event that the loan defaults. Due to this, it’s important that you talk about the risks of using assets as collateral with a financial advisor. Additionally you should discuss it with the people that would be affected by losing the asset, such as your family. A financial advisor can help you assess the risks that are involved, along with the odds of the loan being a success. It’s important that you’re honest with yourself and your situation, as well as what the funds will be used for.
Negotiate If You Can
If you’re a borrower with a good credit history then you may be able to secure a loan with the commitments that you’re comfortable with. Keep in mind that you can always reject a lender’s terms and seek a loan from a different lender. It’s a good idea to shop around for the best rates and terms for your situation in order to get the best deal.