Using collateral loans to borrow on your assets
The guarantee is something that helps secure a loan. When you borrow money, you agree (somewhere in the fine print) that your lender can take something and sell it to get it back, if you do not pay back the loan. Guarantees help you secure large loans and increase your chances of being approved if you have trouble getting a loan.
When you pledge a collateral, the lender takes fewer risks, which means that you are more likely to get a good rate.
How the warranty works
A guarantee is often required when the lender wants the assurance that he will not lose all his money. If you give an asset as collateral, your lender has the right to take action (assuming you stop repaying the loan): he takes possession of the collateral, sells it and uses the proceeds of the sale to repay the loan.
Contrace a secured loan with an unsecured loan, where all that a lender can do is repay your credit or file a lawsuit against you.
Lenders would prefer to get their money back first. They only want to sue you, so they try to use collateral as a guarantee. They do not even want to deal with your guarantee (they are not in the business of owning, renting or selling homes), but it is often the simplest form of protection.
Types of guarantees
Any asset that your lender accepts as collateral (and which is permitted by law) can serve as collateral. In general, lenders prefer assets that are easy to value and convert to cash. For example, money in a savings account is an excellent guarantee: lenders know how much it is worth and it is easy to collect. Some common forms of warranty include:
- Real estate (including the equity in your home)
- Cash accounts (retirement accounts are generally not eligible, although there are always exceptions)
- Machinery and equipment
- Insurance conditions
- Objects of value and collection
- Future payments from customers (receivables)
Even if you get a commercial loan, you can hire your active staff (like your family home) as part of a personal guarantee.
Valuing your assets
In general, the lender will offer you Less than the value of your promised asset. Some assets can be sharply reduced. For example, a lender may only recognize 50% of your investment portfolio for a secured loan. In this way, they improve their chances of recovering all their money in case of loss of value of investments.
When applying for a loan, lenders often indicate an acceptable loan-to-value ratio (LTV). For example, if you borrow against your home, lenders can authorize an LTV of up to 80%. If your house is worth € 100,000, you can borrow up to € 80,000.
If your advertised assets lose value for any reason, you may need to incur additional assets to maintain a loan as collateral. Likewise, you are responsible for the total amount of your loan, even if the bank recovers your assets and sells them for Less than the amount you owe. The bank can take legal action against you to recover any deficit (the amount that has not been repaid)
Types of loans
In some cases, you take out a loan, buy something and give it as a guarantee at the same time. For example, in premium-financed life insurance business, the lender and the insurer often work together to provide the policy and the secured loan at the same time.
There are also secured loans for people with bad credit. These loans are often expensive and should only be used as a last resort. They carry a variety of names, such as car title loans, and usually involve the use of your car as collateral. Be careful with these loans: if you do not pay back, your lender can take the vehicle and sell it – often without informing you in advance.
Borrow without guarantee
If you prefer not to pledge a collateral, you need to find a lender willing to hand over money based on your signature (or someone else’s signature). Some of the options include:
In some cases, like buying a home, borrowing without the use of collateral is probably impossible (unless you have significant home equity). In other situations, it may be an option to go without collateral, but you will have less choice and you will have to pay a higher rate to borrow.