Borrowing Money Against Your Home

Most of the people looking for a loan find it a very easy option to borrow a loan against their home, using the home as the collateral. It seems to be a cheap way to borrow a substantial amount of money. However, is it really the worth to put the home at risk to borrow the money? 

What exactly is it?

It is a loan that is given against a value of an asset, usually the property like home etc. It is put as a guarantee to the bank or any other lender that the amount borrowed will be returned back in full and on time.

Drawbacks

Well, it has its own drawbacks. The biggest drawback is that the property used as the collateral is being put at risk. In case you are not able to repay the loan, the lender will get a legal claim over the property. He may possess your property or sell it to get his payment back.

Benefits

The biggest benefit is that if you are sure that you will be able to repay the money on time, then it is a very cheap way of borrowing money as the interest rates that are applied are usually very low. You can also choose your own period of time over which you will repay the loan. However, you should check well in advance that you don’t end up paying the loan over a longer period of time as it will make the loan less competitive and you may end up paying out more in the long run.

Also, the amount of money that can be borrowed from a secured loan is usually more than any other form of money borrowing. There are no rules to the limit of borrowing through a secured loan. The amount that can be borrowed depends on the value of your property. In fact, if the amount to be borrowed is extremely large, this might be the only option for you. However, try to make sure that you can repay the loan before borrowing such a large amount of money.

One more benefit of this loan is that you can still apply for this type of loan, even if you have a bad credit.

So, go for secured loans against your home, only if you are 100 % sure that you will be able to repay the loan. Otherwise, you may end up loosing your home.

Things to Know Before Applying For a Secured Loan

A secured loan is applicable widely. It can be taken for a number of purposes from house improvements, medical purposes to wedding ceremonies. And the best part is that even a person with bad credit can apply for secured loans.

A secured loan is a loan that is secured by a collateral. A collateral can be any asset of value. The asset has to be handed over to the lender if the borrower is not able to repay the loan amount. The collateral is an assurance to the lender that he won’t lose all his money in case the borrower fails to pay the loan money. In that case, the lender can take the asset, sell it and get his money back. This is a very safe approach of getting a loan as there is no fear of any type of legal action by the lender. The worst that can happen is that the borrower may lose his asset.

Most often it is the lender, who benefits from a secured loan, as the amount lent by the lender is generally less than the value of the asset. Also, there may be heavy discounts on some assets. For example, only 50% of the borrower’s investment portfolio might be recognized by the lender for a collateral loan. This improves their chances of getting all their money back if the investments lose value somehow.

If the assets lose value for any reason, the borrower might have to pledge more assets to keep the collateral loan. Likewise, the borrower may be responsible for the full amount of his collateral loan, even if the bank takes all his assets and sells them for less than the amount owed.

Also, longer the time period of repayment, higher is the rate of interest charged. Though, the amount of monthly repayments can be decreased in this way but the interest rates increase. Early redemption penalties may be charged by some secured loan lenders. These penalties are charged to penalize those who can repay early because the lender is missing out on a sizeable chunk of interest.

The repayment terms of secured loans are more than the terms of an unsecured loan. Some may be even up to twenty years. The interest on secured loans is often variable and can go up or down according to the base rate and the terms of the lender. This makes them a variable rate debt. What might sound like an attractive rate today may not be so attractive in five or ten years' time.