According to a report by the Federal Deposit Insurance Corporation, nearly 80% of household debt in the United States is collateralized. Collateral is a form of debt borrowers seek from lenders by presenting an asset—such as a house, a Picasso, or a vintage car. Collateral loans often come with lower interest rates and better benefits. This blog will explain how to leverage a home as collateral.
Understanding Personal Loans with Home as Collateral
Whenever borrowers use their homes as collateral to leverage their value, such loans are called home equity loans. If you’re mulling over one such loan, you need to understand the associated potential benefits and risks.
Suppose you intend to borrow a significant amount. In that case, personal loans with homes as collateral–which come with lower interest rates–are a go-to option.
Before applying for such a loan, assess your financial situation, consider the loan repayment terms, and have a repayment plan in place. After all, you’re putting your home at risk.
Process of Securing a Personal Loan with Home Equity
As a loan seeker, you can leverage your home equity to carry out a personal loan and secure favorable terms. Let’s understand this process in detail.
Assessing Home Equity and Loan Eligibility
Analyze your home equity and calculate your home’s current market rate. Further, you should cancel out the outstanding mortgage balance from the original amount. Alternatively, you can borrow an equity percentage from the lender.
Secure details about your credit score, income, and debts, as they affect your loan application and approval.
Loan Application and Approval Process
Here are the steps you can follow while applying for a home equity loan so that it gets approved.
Obtain necessary documentation
You should collect all essential documents like proof of income, tax returns, employment verification, and property details. Lenders can determine current value using this data.
Check your Credit Score
Get your credit report and check your score. A higher score means you can get better terms for the loan.
Finding Lenders and Loan Options
Browse different lenders and options to find the best fit for your needs. Take interest rates, loan terms, and additional charges into account.
Application Submission and Approval
Fill out your loan application by selecting a lender and providing accurate information. After submission, your application undergoes a review stage where the lender may check your credit and other details.
Loan Terms and Agreement
Analyze the terms the lender provides, such as interest rates, repayment schedules, and other information. If the terms align with your financial goal, you can sign the loan agreement, binding you legally with the lender.
Disbursement of Loan Funds
Loan approval leads you and the lender to the disbursement of funds. This step may include multiple actions, such as signing agreements, providing additional information, after which the funds are disbursed. The final phase ensures smooth funds transfer.
Pros and Cons of Using Home as Collateral
One should always perform a Home Equity Assessment and understand individual finances and related goals before getting into personal loans with a home as collateral. Here are some pros and cons that identify the situation and provide the required output.
Advantages of Securing Personal Loan with Home Equity
Lower Interest Rate: If you’re using your home as collateral, you have the advantage of paying lower interest rates when compared to personal loans. This lowers costs and saves money over the repayment phase.
Better Loan Amounts: You become eligible for higher loan amounts as your home collateral becomes an attractive option for lenders.
Tax Benefits and Fund Usage: Home equity carried out interest becomes tax deductible and provides potential financial advantages. Borrowers can use the loan for home improvements, educational expenses, and other uses.
Easier Approval Rates: If you have a low credit score, getting a personal loan while using your home equity can attract the lender into giving you the required loan.
Risks and Drawbacks to Consider
Risk of Losing Your Home: If you’re unable to repay your loan, you face the risk of losing your home to the lender.
Upfront Costs: There are additional upfront costs like application fees, appraisal fees, and closing costs, among others, when you apply for a loan.
Fluctuations in the Market: The market price of your home is subject to fluctuations, affecting available equity in case of a downturn.
Alternatives to using Home as Collateral
Exploring Other Sources of Collateral
You can use multiple personally owned assets for personal loans. Lenders may have specific requirements based on the borrower’s credit history and asked loan amount to determine the collateral. Let’s take the example of John, who wants a load of $1,000. Considering the loan amount, the lender may not want John to pledge their home but ask for an alternative as collateral.
Some lenders ask for a minimum balance in your savings account or a certificate of deposit (CD) as collateral. In contrast, others may require your car’s title as security.
Some examples of asked collateral may include real estate, savings accounts, vehicles, CD accounts, money market, or invested stock and bonds. Lenders may also ask for art, collectibles, jewelry, and other valuable items as collateral for loans!
Your asset equity plays a vital role in identifying the value and viability of your collateral. The seeker should understand the lender’s requirements and ensure adequate equity before requesting a personal loan and also read
Considering Unsecured Personal Loans
Whenever the seeker is contemplating unsecured personal loans, they should maintain a balance between the pros and cons coming out as an output from the given financial situation.
If a loan is unsecured, it would not need collateral and provide financial flexibility.
If you use the loan amount to repay a debt, cover emergency expenses, or fund a purchase, personal loans are a quicker and better solution.
Understand the state of your finances and the goals you need to attain before approaching banks.
Seeking Financial Advice
When you’re creating your financial plan, consider taking financial advice, especially in the case of personal loans with collateral.
Financial advisors can help you through the application and approval process, help you understand your financial roadmap, and create a repayment plan that suits your needs and would be the best for you.
People Also Read : Do Personal Loans Verify Income?
Conclusion
In conclusion, you can use your home and other assets as collateral to take out a loan from a trusted lender. Collateral not only improves your chances of getting a personal loan, it helps you get a reliable loan amount.
You need to understand the advantages and drawbacks of every loan type, evaluate financial goals, seek financial advice, and then make a decision.
Try Beem’s personal loan feature to get all the information you need on personalized rates and explore loan options ranging from $500 to $100,000, without impacting your credit score.
FAQs
Can I use my house as collateral for a personal loan?
Yes, you can use your house or any property as collateral. This loan type is known as a home equity loan.
What’s the interest rate on collateral loans?
Interest rates may fluctuate based on the loan amount, borrower’s credit score, and collateral type, among other factors. Loan rates may also vary from low to moderate, with secured ones being on the lower end.
Do banks give personal loans with collateral?
Yes, banks and multiple other financial institutions provide personal loans with collateral, allowing loan seekers to rely on a secure option.
