Collateral is something that aids in getting a loan. When you borrow money, you accept and agree (somewhere in the fine print) that your lender can take something and sell it to get their money back if you fail to repay the loan.
Collateral makes it possible to get bigger loans, and it increases your probability of getting approved if you’re having a difficult time getting a loan.
When you move forward with a loan with collateral, the Los Angeles Hard Money Lender takes less risk, which typically means you’re more likely to get a decent rate.
Learn How Collateral Actually Works
Collateral is usually required when the Los Angeles Hard Money Lender wants some assurance that they won’t lose all of their money.
If you pledge an asset as collateral, your lender has the right to take action (assuming you stop making payments on the loan): they take possession of the collateral, sell it, and use the sales proceeds to pay off the loan.
Los Angeles Hard Money Lenders would prefer, over anything else, to get their R.O.I back. They don’t want to take legal action towards you, so they try to use collateral as a safe blanket.
Ultimately, they don’t even want to deal with your collateral (they’re not in the business of owning, renting, and selling houses), but that is often the easiest form of protection.
Types of Collateral
Usually, any asset that your Los Angeles Hard Money Lender accepts as collateral (and which is allowed by law) can serve as collateral. In general, lenders prefer assets that are easy to value and turn into cash.
For example, money in a savings account is exceptional for collateral: Los Angeles Hard Money Lenders know how much it’s worth, and it’s easy to collect. Some common forms of collateral include:
- Real estate (including equity in your home)
- Cash accounts (retirement accounts typically don’t qualify, although there are always exceptions)
- Machinery and equipment
- Insurance policies
- Valuables and collectibles
- Future payments from customers (receivables)
Our Los Angeles Hard Money Lenders say that even if you’re getting a business loan, you might pledge your personal assets (like your family home) as part of a personal guarantee.
Knowing How To Value Your Assets
Overall, the lender will offer you less than the value of your pledged asset. Some assets might be heavily discounted. For example, a lender might only recognize 50% of your investment portfolio for a collateral loan. That way, they improve their chances of getting all their money back in case the investments lose value.
When applying for a loan, Los Angeles Hard Money Lenders often quote an acceptable loan to value ratio (LTV). For example, if you borrow against your house, Los Angeles Hard Money Lenders might allow an LTV up to 80%. If your home is worth $100,000, you can borrow up to $80,000.
If your pledged assets lose value for any reason, you might have to pledge additional assets to keep a collateral loan in place. Likewise, you are responsible for the full amount of your loan, even if the bank takes your assets and sells them for less than the amount you owe.
The bank can bring legal action against you to collect any deficiency (the amount that didn’t get paid off).
Types of Loans
Los Angeles Hard Money Loans Experts say you may discover that collateral loans in a variety of places. They are commonly used for business loans as well as personal loans.
A handful of new businesses, mainly because they don’t have a long track-record of operating at a profit, are required to pledge collateral (including personal items that belong to business owners).
In some scenarios, you get a loan, purchase something, and pledge it as collateral all at the same time. As an example, in premium-financed life insurance cases, the lender and insurer often work together to provide the policy and collateral loan at the same time.
A financed home purchase is similar: the house secures the loan, and the lender can foreclose on the home if you don’t repay.
Our Los Angeles Hard Money Loan Experts say even if you’re borrowing for fix-and-flip projects, lenders want to use your investment property as security.
When borrowing for mobile or manufactured homes, the type of loan available will depend on the age of the home, the foundation system, and other factors.
There are also some collateral loans for people with bad credit. Los Angeles Hard Money Lenders say these loans are often expensive and should only be used as a last resort. They go by an assortment of names, such as car title loans, and usually involve using your automobile as collateral.
Our Los Angeles Hard Money Lenders suggest that you be careful with these loans: if you fail to repay, your lender can take the vehicle and sell it – often without notifying you ahead of time.
Borrowing Without Collateral
If you prefer not to pledge collateral, you’ll need to find a lender that’s willing to hand over money based on your signature (or somebody else’s signature). Some of the options include:
- Unsecured loans such as personal loans and credit cards
- Online loans (including peer to peer loans) are often unsecured loans with good rates
- Getting a cosigner to apply for the loan with you – putting their credit at risk
In some cases, similar to purchasing a home, Los Angeles Hard Money Lenders say that borrowing without using anything as collateral is most likely not probable.
In other scenarios, it might be an option to do without collateral, but you’ll have fewer choices and you have to pay a higher rate to borrow.