Having loan security or leveraging your assets while applying for a home loan or a business loan can really help. By doing this, you will be able to borrow more money.
However, using your assets as security can be risky. It means that they will be used if you are unable to repay your loan. Hence, if you run into financial strife, your assets could be lost.
BORROWING MORE MONEY
The biggest advantage of securing a loan with an asset is that it allows you to borrow more money, giving you greater borrowing power.
However, in some cases, if you want to borrow a certain amount, you may need some form of loan security before the lender will agree to let you borrow that amount. This is where your assets come in.
If you consider using your assets as too great a risk, you may want to try and reduce your borrowing amount, save up a higher deposit, or wait until you are more financially stable and comfortable.
WHAT ASSETS CAN I USE?
(I) HOME LOANS
If you are purchasing a house, you can often use that same house as loan security. So, if you can’t make your repayments, the bank or lender will be able to sell your house to cover the cost of the loan.
In this circumstance, the lender will need to value your property and decide:
- How quickly the property can potentially be sold.
- If the property is in a good location.
- The condition of the property, and whether it will remain in the same condition.
All of these factors combined will determine the security value of your property.
If your future home is not enough for security, you might want to consider using another property or investment (or downgrading your borrowing amount).
(II) BUSINESS LOANS AND OTHER LOANS
Are you trying to obtain a business loan? If so, you may need to use some other kind of asset as loan security, since you will not be able to use that same business as security.
Some banks or lenders might ask you to secure your loan with a particular asset. The most valuable asset in a lender’s eyes is usually property, whether residential or commercial. Generally speaking, using homes in metropolitan regions as assets are usually not too much of a concern, but homes in other areas may not bring as much security as you might need. Property can also exist in the way of rural land.
In some instances, other assets can include cash, cars, equipment and other businesses.
If you decide to sell any of your property or possessions that have been used to secure a business loan, you will need to replace that security with something else. So, for example, if you originally used a block of rural land as security, but then sold that land, you would have to think about how you will continue to secure your business loan.
WHAT HAPPENS IF I CAN’T REPAY MY LOAN?
If you encounter financial difficulties to the point where you can’t repay your loan (whether definitively or for a certain period of time), the lender will be forced to seize your assets. They will then forfeit and sell your assets, use the money to repay the loan, and forward any leftover funds to you.
Do you feel that you are running into financial troubles? If so, you should discuss this immediately with your broker, financial advisor, or directly with the lender.
You may be able to workout an arrangement or apply for another type of short-term loan to help with your cash flow. Keep in mind, however, that you will need to be confident that you can also repay this loan in the near future.