A secured loan with property as collateral is when you own land or a home and use the value of that property to secure a loan. Lenders are more likely to approve a loan for you over the amount of $25,000 if you use property as collateral. The negative to using property, however, is if you miss payments, the lender can take your property, and often will turn around and sell the property in an attempt to recoup the loan amount.
Sometimes only a portion of the property value is used to get approval. The reason for not using the full value is that if you default on the loan, you will be expected to sell the property and give the money to the lending agency. If for some reason you own property in a declining market, (i.e., the value of the home/land is expected to drop), you may have to pay an additional amount of money to repay the loan if you default even if the lending agency takes your home. For example, if you own a home for $100,000 and the bank agrees to lend the full $100,000 to you, if you stop making payments and your house depreciates in value to $75,000, the bank will still make you pay the full $100,000. This means that you will still have to come up with the additional $25,000 from another source. It is very risky for lenders to loan you 100% of the value of your home. Loans where you own the property outright are also called first charges.
The first step that banks will take before loaning you money using property as collateral is to run your credit. Most banks require that you have a credit score of at least 680 in order to give you a loan. Some will accept scores as low as 630 and others will require at least 710, but this varies based on the lender’s policy. If you meet the minimum required credit score, the lender will then order an appraisal of your home. Most banks will conduct a cost comparison of other recently sold properties near your home. Very few banks will send an appraiser to actually go into your home. This means that the comparison properties need to match what you want to get for the value of your property. Most lenders will only lend you 80% of the equity that you have in the house. If you still have a lien on your house, that amount will be subtracted from the equity. Loans where you still have a mortgage on the property are often referred to as second charges.
The better your credit score is, the better interest rate you will get on a loan. This is true with all loans. Also, you are more likely to get a lower interest rate if you take a shorter term loan. A five-year loan will have a lower interest rate than a 30-year loan, because the lender will get the money back faster. You will have larger monthly payments on a shorter loan than a longer loan.
In addition to looking at your credit score, lenders will look at your debt to credit ratio. If you have too much debt compared to your earnings, you will probably not get the loan, even if your home appraises at a high amount. Banks and other lenders are extremely cautious in today’s market to loan money to people who already have too much debt.
If you need to take out a loan for over $25,000, a loan with property as collateral is your best bet. Banks and lenders prefer secured loans because they will get their money back if you default, and this will consequently reflect in an interest rate which is lower than with an unsecured loan of the same amount. In order to keep your credit intact, and not lose your property, you should make your payments on time each month. Secured loans are ideal for borrowing larger sums of money.