Secured loans: The Businessman’s Last Resort
Secured loans are loans which use properties as its security. The concept behind these loans is that in exchange of the money that will be lent by the lender, one of the properties of the borrower will temporarily be subject to a claim by the lender, such that when the borrower fails to pay the loan, the lender can get such property through some processes.
Secured loans, among all types of loans, are relatively the easiest to acquire because the lender is assured that he can go after something if the borrower fails to pay. A security is required because in the past, whenever borrowers fail to pay their loan, they simply vanish. They may leave the country or hide themselves in some places, and the lender is left clueless on how to claim back his money.
However, even though they are the easiest to obtain, they are also the riskiest to acquire because when the borrower fails to pay it, he will lose not only the money he borrowed, but also the property he used as collateral. As such, many people consider secured loans as their last resort for financing.
Nature of Secured loans
Secured loans are usually crafted by an agreement between the parties. Some countries do it for formality purposes, while others do it because they are required by law. Like simple loans, they are charged with interest rates; the only difference is that a security is added to it. The period for payment is also different because unlike simple loans, these loans let the borrower pay for a period of fifteen to thirty years.
These loans are considered by many to bring both parties into a win-win situation because of the following:
1. The long period of time allows the borrower to have sufficient time to pay off the loan, while the security used as collateral removes the financial risks faced by the lender in giving his money; and
2. In extending the loan, both the borrower and the lender are placed in equal terms, because both of them are giving up on something to obtain another.
Types of Secured loans
There are two common types of secured loans:
1. Mortgage loans
Mortgage loans are those which are secured by properties. Mortgage loans can be a real estate mortgage loan or a chattel mortgage loan. The former uses real properties as collateral such as land and buildings. The latter, on the other hand, uses personal properties as collateral, such as cars and furniture.
2. Home mortgage loans
Home mortgage loans are those which are secured by the family home of the borrower.
In some countries, home mortgage loans are not allowed by law; they prohibit the use of the family home as a collateral for obtaining a loan, unless such loan is used for the benefit of the family. The United States of America, on the other hand, allows the same without any qualification.
Advice On Acquisition
Before resorting to secured loans, a person must consider the following:
1. Prepare the properties to be used as collateral
Before getting these loans, a person must have enough properties to be used as collateral. The properties may range from real properties such as a house and lot, to personal properties such as a car and pieces of jewelry, depending on the type of loan secured. The value of these properties should amount to exactly or more than the amount borrowed. For instance, if a person borrows $100,000, the properties must amount to $100,000 or more.
2. Use the long payment period to save
Because secured loans take fifteen to thirty years before it becomes due and demandable, there is no reason for the borrower to fail in paying the loan. He must, therefore, use the long payment period to save and pay it in installments or in a way depending on what has been agreed upon.
3. Do not secure the same property for another loan
As much as possible, a person must avoid using the secured property as collateral for another loan. This results not only to double security, but also to fraud.
This is something that must never be done by a borrower if he desires to get more than one secured loan. If he does this, he might be required to secure another property for such loan, and if he only has one property, that loan will not be granted and he may be subject into a lawsuit for fraud. Also, his credit standing will decrease, and like in the case of other loans, companies will hesitate in extending credit to him.
4. Get a guarantor
A person may choose to get a guarantor who will pay the proceeds of the loans if in case he fails to pay it. Getting a guarantor does not only increase his success of paying the obligation; it also helps him protect his interest in the properties used as collateral. However, getting one does not save him from paying the obligation, because after the guarantor pays, he can go after him.
5. Do not let interest charges accumulate
A person must not let interest charges accumulate. While he is taking advantage of the long period of time to pay the loans, he must, nevertheless, prevent interest rates from increasing the amount that he has to pay.
Secured loans are the easiest to obtain, yet the riskiest to deal with. It must be considered as a last resort, and as such, one must consider other financing options before taking it.