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Collateral, Bank Loans, and You
Banks and lenders use language we typically don't use everyday. Collateral is something everyone has a sense for but may not know the true meaning and what it can provide you when you're looking to financing something.
A collateral based loan allows you, the borrower, to use different things to secure a loan. Business owners may use, equipment, property, and/or stocks or bonds to establish a collateral loan. If they use their ownership in property, perhaps a home, or a piece of land, is set up as the collateral. In the case of a default, the borrower must sell the property to pay back the loan, and the bank or lender can sell the property also, even if only a portion of the full value belongs to them. Although a bank or lender wants to avoid taking possession of the home or property, in many cases, a lender would sell the home, and give the previous owner the monies not offered on collateral.
A collateral loan could also be based on expected/projected collateral, like the expected return or profit on a project. This was more common place a few years ago, less so now. In rare instances, a borrower can use property like high-valued jewelry as collateral, or other high-valued goods. Most collateral loans are based on paper assets, or on real estate.
It should also be noted that if the collateral given decreases in value and the borrower defaults, the borrower will still be responsible to repay the amount at which the collateral was originally appraised.
Example: Jerry borrows $200,000 on a home of the same value. If the home decreases in value, say to $175,000, Jerry must still pay back the full amount. If Jerry has defaulted on the collateral loan, his home can be sold. However, Jerry will still owe the lender $25,000. This may require Jerry to sell more possessions or consider bankruptcy.
You can borrow against Certificates of Deposits, mutual funds, bonds, stocks, and even on some IRAs, 401(k)s. The percentage is based upon the liquidity value of the asset and market conditions. For instance, a few years ago you could get a higher ratio on your investments in stocks that you could probably get now. A lender might offer 90-98% of the value of a Certificate of Deposit but only 50-65% of the value of a stock. Real estate too has weaken in value in some areas but typically hold 65% or better loan to value ratios when used as collateral.
You can also borrow against Whole Life Insurance policies. There are even special strategies where you can use a Whole Life Insurance policy, structured properly, to become your own bank. You can finance your next purchase, say a car, payoff your debt, or even become a lender and provide money to others in exchange for interest and principal payments. You can become your own banker.
Hard Money Loans, Private Loans, and Conventional loans are all types of collateral or asset-based loans. These may be offered by a bank, a non-bank lender, or private investors
Author Resource:-
Jim is a former VP of a bank & now a commercial loan broker, speaker, author. Jim enjoys helping entrepreneurs find ways to finance projects. Get his free ebook at http://www.doughforthedream.com, read free info at doughforthedreamblog.com or listen to audio http://www.doughforthedream.podomatic.com
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2010-03-20 05:56:43 By:
Jim Frey Article Read 624 Times Article From Article Listed
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