Understanding the Difference Between Secured and Unsecured Loans

Secured and Unsecured LoansDeciding to take out a loan is not a decision that should be made lightly. There are so many factors to take into consideration and if you have poor credit, then the decision is even bigger than if you had a stellar credit report.

In all honesty, not everyone has the perfect credit report and many people go through some financial hardship at some point, a hardship that remains on their report for years restricting what they can and cannot do and whether or not they can apply for a loan and be successful in their application.

There are two main types of personal loans that you need to be aware of, both of which are possible with a bad credit report. The first is secured and the second is unsecured. Both offer advantages and disadvantages.

Secured loans are often preferred by lenders because they reduce the risk to the lender. These personal loans are usually offered for larger amounts, maybe you want to do some renovations to your home or build an extension on your existing property. They require security, this usually means putting your home up as collateral.

The advantages of a secured loan are that because your home is used as security, your interest rates tend to be lower. You pay the loan back in monthly repayments, which can be fixed or not. Be aware if you choose this loan and don’t fix the repayment amount, the repayments could increase or there could be a lump sum payable at the end of the loan agreement.

The disadvantage to secured loans, whether you have a poor credit history or not, is that should you be unable to repay the loan for any reason, there is the possibility of losing your home, which will be sold to repay the amount you owe. This is not a situation anyone wants to find themselves in.

Bad credit unsecured loans are the leading choice which eliminates the risk of losing your home and reduces the risk to you, while increasing the risk to the lender. With unsecured loans you get offered a loan at an agreed repayment amount, you make regular monthly payments until the loan is paid back.

Bad credit unsecured loans don’t require any security and are offered on smaller amounts, usually up to around $10,000. While these loans offer a higher interest rate, they do reduce the risk to you and the risk of losing your home should you miss a payment or two.

As with any loan, whether you choose secured or unsecured, you need to take some steps before applying. Often you choose a personal loan because you need urgent cash that you don’t have available in the bank. Banking institutions these days make it exceptionally difficult to secure any loan, they expect you to have cash in the bank and a stellar credit report. There are lenders online that will help you get the funding you need even with a bad credit history.

Before deciding between the two types of loans available, it’s a good idea to get your hands on your credit report and see if there is any way of improving it before you apply. If not, then consider how the repayments of a bad credit unsecured personal loan will affect your monthly budget and ensure that you can repay the amounts each month without going into default.

Going into default will only leave you with even more money you have to pay and more bad news on your credit report, which is the last thing you want.

Situations When Hard Money Loans Are Utilized

Hard Money LoansOwners of commercial properties have capital needs for varied purposes such as purchase and renovations. In a perfect world the owners of the property would seek out conventional lenders such as banks and credit unions since they would most likely offer the lowest cost of money. Sometimes traditional financing is not available to the borrower or perhaps the borrower does not want to tie up personal funds to finance the project at hand.

In today’s more complex borrowing world traditional lenders cannot fulfill all of the needs of commercial borrowers. Often these borrowers look to Private Lenders to move their projects along. On the surface one may question why a borrower would be willing to pay much higher interest rates to Private Lenders (Hard Money Lenders) and may instead elect not to pursue their project until traditional financing could be found.

Hard Money Loans are typically short in duration and come with higher interest rates and fees when compared to traditional financing. For borrowers the analysis is about their end goal and the planned realization of profit from the completion of the project. Hard Money Loans play an increasingly important part in the commercial real estate world. Here are some instances where Hard Money Loans may make sense for borrowers.

Capital Improvements

If a capital improvement, repairs, or renovations are needed to the property which if completed would enhance the value of the property from both a valuation and/or rental income standpoint – a borrower may look to the shorter duration – higher interest loans as a wise move to achieve the enhancements to their properties. Often in these situation once the work is complete and the increased value and/or rental income is realized the borrowers can look for more traditional financing and pay off the Hard Money Lender and replace the loan with lower cost financing. Or they may look to sell the property and take the profit and move onto their next project.

Development

If a borrower is the owner of a piece of raw land and wishes to proceed with a “ground-up” development – Hard Money Loans may be a source of financing that they cannot find in the traditional marketplace. Lenders will look at a host of variables when assessing the credit worthiness of the project including the borrower’s development experience, collateral, timeline, borrower’s equity in the project, project presentation, and the financial reserves of the borrower. Weakness in one or a combination of these factors may cause a traditional lender to decline the project financing.

Hard Money Lenders will consider the same factors but often weigh them different in making their final determination. Conventional lenders will often put caps on the construction loans that they make as a percentage of the total development costs. In contrast, Hard Money Lenders may lend up to 100% (or more) of the construction costs if the analysis of the project warrants such. In other words – where conventional lenders are limited in the scope of the loans they are willing to make – Hard Money Lenders with experience in development may weigh the attractiveness of the overall project in their determination and ultimate decision.

Purchase of a Property

When borrowers are interested in purchasing a property often the timing of the purchase is critical. Hard Money Lenders service this market and provide an effective tool in the purchase process. Attractive real estate opportunities and strategic property purchases are often time sensitive. Traditional lenders are typically not able to provide financing quickly and thereby are often not a good alternative in these types of real estate deals. Hard Money Lenders are nimbler and able to evaluate, approve, and close loans quicker than traditional lenders.

Undervalue/Underperforming Properties

Undervalued properties or properties that are performing below market efficiency are good candidates for Hard Money Lenders. Traditional Lenders shy away from these loans due to the underwriting guidelines related to income statements and current expenses. In contrast Hard Money Lenders focus primarily on the value of the underlying property. With a properly constructed loan a real estate investor can obtain the required financing to provide time to improve the property, fill vacancies, increase rental income, and get expenses in line. Once the property is stabilized the investor can seek traditional financing to lower interest costs going forward.

Loan Underwriting

It is understood the credit worthiness of the borrower is a primary focus in the underwriting of a traditional real estate loan. Conventional lenders are also restricted by regulatory guidelines which limit how creative they can be in the loan approval process. Factors such as late payments, tax liens, mechanic liens, bankruptcies, foreclosures, and high debt levels all play a part in the underwriting of a loan.

Hard Money Lenders set their own standards concerning the level of risk they are willing to accept. These lenders can establish asset based loans whereby the cornerstone of the loan is the property itself.

Current restrictions in the traditional financing marketplace for those real estate investors that own more than 10 single family rental residences make it difficult to borrower additional funds. Hard Money Lenders are not as concerned about the number of properties that an investor owns rather they analyze the property itself and its attractiveness as an investment.

In closing, Hard Money Lenders can be looked at negatively because they charge higher interest rates to their borrowers. However, Hard Money plays a necessary role in the real estate investment marketplace as they fill a need that is created by the lack of traditional financing sources. Often the higher costs of the loan is well worth the purpose it serves. This provides investors the opportunity to participate in these loans and earn attractive yields with the security of a first position lien status.

A Guide To Loans That Are Unconventional, But Are Equally Important

LoansToday, you will find a range of bank loans and finances to choose from. However, there are a couple of loans that are yet to be heard of, but are important and can lend immense value to your overall portfolio. So now is the time to read about such exotic loan types that are not so much popular; but when it comes to significance, their importance is undeniable.

Portfolio loans

Portfolio loans are actually designed to get the loan applications of borrowers approved whenever they fail to complete the eligibility criteria for any other, more normal financing product. Such mortgage loans are largely funded by credit unions, small-sized banks, and other mid-sized commercial mortgage lenders. The reason why this loan type is found in credit unions and local banks is because they are way more home grown than any of the common mega lenders. Further, these lenders want to play a part in writing the growth story of their local economy. Now, let us read up on the factors why such loan types can be considered while you purchase your next residential or commercial real estate.

Why portfolio loans must be included in your investment portfolio?

The key reason why a portfolio loan must be opted is whenever you face recent credit issues. Many a time, a portfolio loan is opted whenever borrowers have wrecked their respective credit histories; perhaps their credit was destroyed because of either a nasty divorce or a business deal gone bad. This will, indeed, have a massive impact on the borrower’s capacity to earn for at least the next 12 months. And many times, this phenomenon forces foreclosure or possibly bankruptcy. So, in short, this loan type is needed whenever the borrower is going through a rough patch.

Blanket loans

Put simply, a blanket loan is a type of mortgage financing that will make the transactional phase becomes easier and quicker. Here, just a single mortgage will cover or secure more than a single parcel of property. They are, by and large, commonly used by commercial land developers and investors; however, in a couple of cases, they may even be used for residential transactions-in this case, the loan will act as a bridge between the new and the old mortgage.

Why should you opt for a blanket loan?

Blanket loans will easily eliminate any need for refinancing whenever the old home is sold. During such a period, whenever the portion that covers the old home is paid, the blanket loan will simply become a standardized mortgage that covers the new home or homes.

Cross-collateral loans

A cross-collateral mortgage is a loan that will use multiple (or at least two) properties as the collateral before the amount is lent to the borrower. This mortgage will be cross-collateralized against a range of properties and will provide additional security, which, finally, compels lenders to offer the loan. By and large, this loan form is offered by private banks as well as portfolio lenders.

Why cross-collateral loans are preferred?

There are two key benefits: The first one is that this loan is beneficial for lenders as they will get additional security. The second benefit is for the lender; now, as the lender brings an additional value (in the form of multiple properties) to the table, the borrower will have a lower LTV – and a lower LTV implies a lower price charged on the loan.

So here are the top three of the most unconventional residential and commercial real estate financing options that must be chosen by investors who want to bring diversity into their portfolios.

Hacking Loan Interest Rates

Loan Interest RatesTragedy strikes and suddenly you need to help pay the bills for a loved one. Your soon to be pride and joy became triplets and the one bedroom you prepared just isn’t big enough. Life can throw some curveballs your way and the last thing you want is another surprise when you show up at the bank. With a little bit of planning you can keep the loan interest rates down and get back to more important matters.

Loan Rate Basics

Let’s cover the elephant in the room first. You already know your credit score is the single most important factor in deciding the loan interest rates offered. What you may not know is the lower your score the harder it will be to secure a decent loan and the higher the annual percentage rates will rise. It’s important to look in the mirror and know where you stand before you start applying for these loans. Every time you apply for a loan a new mark is added to your credit score and too many of these will make lenders uncomfortable. It’s important to go in with a game plan and stick your landing the first time.

Secured Loans

With your credit history in mind you’re ready to decide what type of loan to apply for. Almost every loan out there falls into one of two categories either secured or unsecured. Secured loans require a valuable possession such as your car or house to be put up as collateral and if you default on the loan the bank has a right to sell the possession to make up for their losses. These loans are considered lower risk so they tend to have better loan interest rates and generally have lower credit score requirements. Some of the most common secured loans you may already be familiar with are vehicle loans or home equities.

Unsecured Loans

The other popular loan type is unsecured, they are occasionally called personal or signature loans because all they require from you is to sign on the dotted line. No collateral is required for these and as a result if you were unable to pay it back there is little chance the bank can recoup its loss. With great risk comes great rates; these loans have some of the highest rates and require a much higher credit score to attain. It’s a common wives tale that unsecured loans are only for those with a high net worth. While that is a myth it is true that these are harder to attain and are much more expensive.

One Last Factor: Loan Term

The term is another important factor that determines the loan interest rates you’ll be offered. Banks consider longer term loans to be riskier so they increase the rate accordingly. If you’re pocketbook can afford it a shorter term might mean a lower rate and peace of mind sooner when the loan is paid off.

There are a lot of factors that a lender will look into to determine the risk but the three to keep in mind are your credit history, the type of loan and the term. With a little bit of forethought you can be an informed consumer and keep the loan interest rates down to a minimum when life comes knocking.