How to Use Land as Collateral

Empty parcels of land can sometimes be enough to offset loan risk.

Empty parcels of land can sometimes be enough to offset loan risk.

If you're looking for a personal loan, many lenders will loan to you based solely on your financial history. This history, shown through your credit score, your income and the debt you already owe tells the lender if it is likely that you will pay back your loan. If your credit score needs some work, however, you might find that some lenders are unwilling to offer you a loan. This can sometimes be solved by applying for a secured loan. A secured loan is a loan that is backed by collateral. Usually, a loan with collateral requires that you allow the lender to take possession of something valuable you own in the case that you default on the loan.

Providing Collateral

If you're looking to take out a secured loan, you may need to provide "collateral" for that loan. Collateral is something of value that you already own. Putting up something you own as collateral means that the lender can seize it if you default on your loan. This gives the lender a guarantee that they will be paid back for the loan, either from your monthly payments or from seizing the collateral. Because the purpose of the collateral is to protect a lender from losing out on the loan money, the collateral must be something of value. Borrowers sometimes put up car titles, savings accounts or businesses as collateral. The collateral must have sufficient worth to assure the lender that you won't default on your loan payments or if you do, the value of the collateral will help make up for the lender's loss.

Land as Collateral

In some cases, lenders will allow you to put up a piece of land as collateral for a secured loan. Not all lenders accept land as collateral, and even those who do will require that the land be worth a certain amount in order to consider it for use as a collateral. The lenders will also require that you are the owner of the land that you want to use as collateral. Most lenders will not loan to borrowers who want to use land that belongs to more than one person as collateral.

Securing a Loan with Collateral

To secure a loan using your property as collateral, you will need to find a lender willing to accept your land as collateral. Once you have identified appropriate lenders, you must determine how much money you need to borrow and if your land is valuable enough to serve as collateral for the amount you wish to borrow. Once you know the amount of money your lender will lend you based on your land, you will need to complete the loan process. This will involve showing proof of ownership of the land you wish you use as collateral to prove that you are free to use the land.

Your lender may also need time to appraise the value of the property in question. If the true value of the land is unknown, the lender may need to hire a licensed, third-party real estate appraiser. This is usually necessary when the property in question is potentially valued at $50,000 or more. Likewise, If the loan is valued over $250,000, the appraisal may need to be certified to make sure it is accurate.

The lender will also review the land deed to check for any existing liens or debts that may be attached. If other liens already exist on the property, the lender most likely will not accept the land as collateral.

The lender will then go through the terms of the loan they are willing to offer you. The type of real estate you put up against the loan will determine the amount you're offered. For example, land with an occupied residential property may bring up to 75 percent of its appraised value in the form of a loan. For a property that is ready for building, you may get 50 percent and vacant land can usually be borrowed on for up to 30 percent of its value.

Tip

  • Even if you request a loan for far less that the full value of the land in question, don't plan on taking another loan out on its remaining worth. Lenders typically won't allow any liens other than their own on the land used as collateral. If other creditors have claim to even some of its value, it decreases the return and the chances of full reimbursement for your lender.

Warning

  • The interest rate you're likely to pay on a loan with vacant land as collateral is far higher than it would be for other forms of guarantee. With points and interest you may be looking at 15 percent or more.
 

About the Author

Bea is a personal finance and legal writer based in Texas.

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