Are you looking to reduce payments for secured or unsecured loans? Starting or maintaining a business requires money/capital, which might not always be available. There are loans to help personal individuals and businesses deal with financial tight spots, and these hard money loans vary significantly.
In addition, these loans can be secured or unsecured, which greatly affects the terms of the contract. They usually have less favorable conditions and more restrictions. However, you can leverage real estate to reduce interest rates on unsecured loans.
About Secured and Unsecured Loans
A loan is secured or unsecured based on the presence or absence of collateral. They also differ in terms of interest rate, credit amount, repayment periods, and terms of contract. Each type of loan has its advantages and disadvantages, and we’ll discuss each below.
Unsecured loans
Unsecured loans are financial contracts that are not backed by collateral. The borrower is not required to drop property or something of value as a guarantee if the terms of the contract are violated. Instead, the verification process is more stringent and it’s harder to get approved.
In addition, these loans are suitable for new startups who don’t have valuables or real estate to use as collateral. Also, you don’t have to risk losing your properties when you’re behind on payment or in violation of the terms and agreement.
However, this type of loan poses more of a risk to the lender than the borrower, hence there are strict limitations. The maximum amount that can be released is much smaller than secured loans, to limit the risk faced by the lender.
Also, they have shorter repayment duration and higher interest rates. These factors can be problematic in the long run because your debt can increase quickly within a short time, leaving you with a bad credit review.
Unsecured loans enable you to access funds quickly without having to back with assets, which is great for new businesses. However, it has higher rates and lower credit amounts. Examples of unsecured loans are business line of credit, invoice factoring, term loans, and MCAs.
Secured Loans
Unlike unsecured loans, financial institutions or lenders that issue secured loans require backing with assets. These assets serve as collateral and insurance that you will maintain the terms of the agreement.
Secured loans are less risky for both the lender and the borrower. The lender has the right to confiscate assets used as collateral if the borrower refuses or is unable to pay off the debt. The presence of collateral also encourages the lender to give you more favorable terms, depending on the value of your assets.
Secured loans come with benefits, and most of these are suitable for large business expenses. Securing a loan with assets reduces the risk faced by the lender, therefore they can afford lower interest rates. These lenders are also inclined to loan larger credit amounts since there’s collateral to fall back on.
Aside from the high credit limit and low-interest rate, secured loans also have large repayment windows. There is less of a rush on the borrower to make full payment and the repayment plans are usually spacious.
Secured loans are suitable for businesses in need of large capital or funding. You can use secured loans to improve your credit score.
However, there are also drawbacks to securing loans with assets. You‘re at risk of losing your assets because the lender has the right to seize them per the terms of the contract. It also takes a while to process payment because the loan sum is usually a lot.
Examples of secured loans are hard money loans, small business administration loans, private money loans, invoice financing, equipment financing, business line of credit, and term loans.
Why Should I Leverage Real Estate to Reduce Payments on Loans
Unsecured loans have lots of limitations to reduce the risk faced by the lender. These limitations include low credit amounts, high-interest rates, and short repayment time. You can access more favorable loans by backing them with assets.
Let’s see how leveraging real estate can help you with loans:
Better Risk Overview
When applying for a loan, the lender or financial agent performs a risk assessment using the information you’ve provided to determine how risky it will be to give you the loan. The higher the risk, the lower the chances of getting the loan.
Having substantial assets that can be used as collateral greatly improves your standing during risk assessment. Securing loans with assets gives the lender more confidence in your ability to pay back, making you less of a risk.
Having a positive review during risk assessment is very crucial because it will impact the terms of the contract such as the amount releasable, interest, and more.
Better Contract Terms
Borrowers with assets for backing are trusted by lenders. Lenders are more inclined to favor borrowers capable of securing their loans. You can get more favorable underwriting and contract terms.
Lenders are ready to offer better terms such as lower interest rates, and other options that reduce the interest payable on your hard money loans. Most lenders prefer businesses that can provide collateral, and they will give favorable terms to keep such clients.
Longer Repayment Duration
The amount credited in secured loans is usually large sums and a short repayment plan won’t be favorable to you. Lenders plan out repayment schedules, and you’re required to make monthly payments based on your contract.
You can reduce the monthly payments on your loan by using assets as collateral. Lenders factor in the level of risk when determining the terms of a loan; those with higher risk levels have shorter repayment duration. Having collateral reduces your risk level and gives you a favorable repayment schedule.
Higher Credit Amount
The principle of lending and borrowing is based mainly on the risk faced by the lender. Unsecured loans pose more risk to the lender because the borrower can default on the contract without repercussion, therefore, the funding options are lower.
However, secured loans are backed with assets, and there is less risk for the lender. Therefore, lenders are more inclined to give more funding to businesses that can back up their loans with assets like real estate.
Also, the size of the loan is determined by the value of the asset used as collateral. You can increase your credit cap by using more valuable real estate as backing. This gives you access to more funds and purchasing power to boost your business expenses.
How to Leverage Real Estate on Loans
Here are some steps to help you get a secured loan using real estate:
Evaluate Your Needs and Value of Your Estate
You must consider the type of loan and the value of your estate before applying for any loan option. The type of loan entails the credit amount, nature, interest rates, security, and repayment plan. The type of loan is dependent on your needs and that of your business.
It is important for you to also check the value of your real estate. The value of your estate will affect the amount the lenders will consider. The higher the value of your asset, the higher the credit cap on your account.
Research Lenders
Some lenders deal majorly in real estate-backed loans such as hard money lenders, and home equity lines of credit. Find out about different lenders, and go for one with a good track record in real-estate-secured hard money loans.
Documentation
You will need to provide some documents when applying for these hard money loans. You will need documents like a deed of ownership for the property, bank reviews, a business plan and loan proposal, and more. Different lenders can ask for extra documentation, you must have all the requirements.
Submission
We recommend trying out multiple lenders to increase your chances of getting a better deal. Applying to more than one lender gives you insight into the different rates and conditions. You can compare the offers from the different lenders and select one that is preferable.
Negotiate
Ask for better deals when you can. Some lenders allow room for negotiation but you won’t know if you keep quiet.
Get Secured Loans With CapitalMax
Funding is important to every business, and you can get it through loans. Secured loans are better options for long-term funding because they have low interest rates, and longer repayment durations.
CapitalMax is here to guide you on how to get secured loans. You can get all the information you need to get a secured loan from us. We also have services to help you raise secured capital for business investments.