In many ways, a loan is only as strong as the collateral behind it. Because borrowers need loans for different things, lenders accept different assets as security for the deals. Often the type of loan is tied directly to the collateral. These types of collateral loans each have unique terms and conditions.
A mortgage loan is secured by real estate. The purpose is to purchase, refinance or make improvements to a property. Lenders will lend between 80 and 97 percent of an owner-occupied property, that is, a home used as a primary or secondary residence. For non-owner occupied investment or rental properties, the lender will make loans up to 70 to 75 percent of the value. The loan is secured by placing a mortgage lien on your property. Rates will vary based on the market and terms can run from five to 30 years.
If you have a small business, business assets are a typical form of collateral, specifically accounts receivable. Your accounts receivable aging report is a list of all outstanding invoices waiting to be paid. You will pledge these to the bank and, in the event you fail to make payments, the bank can collect the receivables direct from your clients. Typically banks only lend up to 70 percent of your accounts receivable aged 90 days or less. If you have receivables that have not been paid for more than 90 days, it is likely you will have trouble obtaining payment, making those accounts less attractive to the bank as collateral. This type of collateral is common on one-year lines of credit.
Another type of financing common with business owners is equipment. Typically, these loans are used to purchase or refinance the equipment being offered. Equipment can describe anything from lawnmowers to computers to construction equipment. The amount you can borrow against the equipment depends on how old the equipment is. For new equipment, that is equipment purchased in the past year, you can borrow up to 70 percent. This number drops to 60 percent for older equipment. Typical terms are three to seven years.
On loans to purchase or refinance a vehicle, the vehicle ends up as the collateral. These loans commonly run for three to five years, usually no more than seven. This is due to the fact that the vehicle depreciates in value quickly. Like mortgages, lenders will give you more, usually 70 to 80 percent on a new vehicle as opposed to less on a used vehicle. While certain lenders may provide higher financing, it will usually be accompanied by less favorable rates and higher fees.
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