An Introduction to Collateral Loans

"An Introduction to Collateral Loans"

When you talk about collateral, it’s something that you use against a loan. For example, you borrow a certain amount and agree on the contract that your loan provider can take your property and sell it, to cover for the amount that you borrowed in case you are unable to pay back the loan. At some point, collateral gives you better chances to secure huge loans and increases your loan approval rate during tough financial situations. When you present collateral, the loan provider will face less risk, thus you will be given a better loan offer.

This article is brought to you by Perfect Payday, and while we don’t offer collateral loans, we do offer loans that do not require collateral. Apply for a Perfect Payday loan today.

How does collateral works?

Drawing from our experience, borrowers are usually required to pledge collateral if the loan provider wants to have a sense of security that they won’t easily lose the money that they lend. Once you present a valuable item as collateral, the loan provider has every right to repossess the collateral, sell it, and make use of the earnings to repay the loan – in case you default. However, as much as taking away your asset sounds good, loan providers want nothing but to get their funds back. Suing you is never on their agenda, that’s why they try to utilize collateral as a way to protect themselves.

Different kinds of collateral

Any valuable item that your loan provider and the law considers as collateral, can be treated as collateral. Generally, loan providers favor valuables that are quick to value and convert into cash. For example, the funds in your savings account are excellent collateral. Loan providers instantly know how much it costs and it’s very easy to get. Other popular forms of collateral are the following:

  • Real estate
  • Automobiles
  • Insurance policies
  • Cash accounts
  • Collectibles and valuables
  • Future payments from clients
  • Equipment and machinery investments

You can still use your assets such as your residential property as collateral even if you’re planning to secure a business loan.

FAQs about Collateral

  1. Is it possible to pledge my land as collateral on a certain loan?

Certainly. You can use the equity in your land to construct your dream house!

  1. What is land equity?

Generally speaking, land equity refers to the difference in the value of your land and the amount that you owe on it. For instance, if you sell your land, the land equity would be the money you have left.

  1. Can I use my land equity to fund the construction of my house?

Yes, there are loan providers that provide approval for a construction loan that comes with land equity, depending on the value of the land during the loan procedure. Some loan providers will offer to loan you as much as 80% of your equity.

What is a construction loan? And how does it work?

Our findings show that, construction loans are a popular loan as the type of loan that is challenging to apply for since they come with a lot of factors and it involves numerous people. To apply for a construction loan, you need to submit a copy of your construction or building tender or quote and your proposed construction plans for the house. The loan provider will assign their valuer, to sum up the value and price of the property once the construction is done. Once they see that the appraised rate is good, the loan provider or bank will approve the loan.

Drawbacks of land equity construction loans

The major drawback when it comes to applying for a land equity loan is borrowing power. The banks take advantage of the value of your land together with the price of construction as the financial purchase value. This means that when buying land, make sure you do your research to find out if the amount that the seller is presenting is close or less than the land value. Here are some essential questions that you have to ask:

  • Is this a great location?
  • What is the size of the land? If the land is too large, you might decrease your chances of finding a loan provider.
  • Does it have access to electrical, sewer, and water services?
  • Does the property have road access?

Our research indicates that, if you are a landowner who has invested a lot of money on it, then you’ll have enough land equity when you decide to build your home. But, if you want to build right away, your savings is a much viable option since it won’t require you to apply in the bank to redraw the funds via your equity.

Do you need a quick loan and are unsure where to apply? Get a cash loan from Perfect Payday today. We will give you a quick decision on whether your application is accepted.

The key to using your land as a form of collateral is to research the location and value the land before buying the property to guarantee that you will get an exceptional deal. With this, you’ll be able to acquire the money that you need to construct your house and pledge the land as collateral.

About the Author

Lucy has over a decade of experience in finance. She is currently the content curator here at Perfect Payday.

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