Banks and other financial institutions have become very popular when it comes to lending. As the economy continues to grow, the need for capital continues to increase. But the need for funds is not only restricted to the capital, or rather business needs. Every day, people find themselves in financial needs, and it is only necessary to borrow. For instance, one may be plagued with an expected medical emergency.
We have always been advised to save for emergencies. But from experience, it is common to found unprepared. Still, you may not have accumulated enough funds in your savings account to see you through such a condition. While it is good to avoid debt as much as possible, there are many circumstances in which a decision to borrowing can be justified.
But do you meet all the qualifications that lenders look for before approving applications? There are different types of loans with specific requirements. In this blog, we are going to discuss in detail one such kind of loan – secured personal loan. How much can you borrow based on your collateral evaluation? Read to the end and find the answer to this question.
Know the Basics
To respond to this question appropriately, it is vital to understand the specific details about this type of borrowing. Generally, there are two types of personal loans – secured and unsecured, each with a particular set of requirements. For instance, secured loans require the borrower to pledge an asset as security to the loan. In case you fail to keep with the payments or default, the lender will use the asset to recover the outstanding loan amount. This type of lending is prevalent, especially to individuals who do not qualify for unsecured personal loans.
Unsecured loans do not require the borrower to pledge an asset as security for the loan. However, the requirements for these types of loans are stringent. The borrower must pass the eligibility test, which may vary between lenders.
As a borrower, you will be required to have an outstanding credit score, a low debt-to-income ratio, and prove of income, among others. If you have bad credit, it means your creditworthiness is questionable, and thus, you may not qualify for these loans. Even if you find a lender who is willing to lend you, it will be at higher interest rates because you are a high-risk borrower. You only need to look for a money lender like Reliablemoneylender.sg, you can get better terms.
So then let us draw the line between these two lending options. While secured loans require the borrower to pledge an asset as collateral, unsecured loans do not require security. Rather lending is primarily based on the borrower’s standing before the lender.
It is also important to acknowledge the fact that even business loans can be secured or unsecured. Whichever the case, the requirements we have just discussed apply. With these basics, let us get back to the question we raised at the outset.
The Amount You Can Borrow Based on Your Collateral Evaluation
Talking of the amount you can borrow based on your collateral evaluation, it means you have opted for secured loans. So, what is the determining factor? The amount of loan you are applying for and the value of the asset used as collateral.
In secured personal loans, the value of the asset plays a significant role in the amount that you can qualify for. Lenders often use a tool called the loan-to-value ratio in determining the amount they can lend you based on the collateral.
In most cases, lenders prefer giving loans of the amount that equals 80% of the value of the asset. This means that if an asset is valued at $100,000, you are qualified for a loan of up to 80%.
Some lenders can provide loans of up to 90% the value of the asset used to secure the loan, while others may only be willing to offer an amount worth less than 80%. For instance, real estate financiers always provide loans of not more than 75% of the value of the property.
The type of asset that you intend to determines the loan amount that you can be offered. In this light, it is vital to understand the valuation of your asset to choose the most appropriate loan.
What about business loans? The value of the collateral to be used solely depends on your business needs. In general, most lenders demand the worth of the collateral to match the asset you are securing. This means if you want a loan worth $100,000, you need collateral of at least worth $100,000. In case the business cannot afford to repay the loan, the lender will be at liberty to seize the collateral and sell it to recover the outstanding loan amount.
In general, business leaders demand collateral because it lessens their risks on you. If you cannot meet all the requirements that lenders often want, for instance, good credit, you will be required to give collateral. But even businesses that appear to be well established may struggle or fail to repay the loan. Things are always different on the ground. Lenders protect themselves by giving secured loans.
Just like in secured personal loans, the loan-to-value ratio is the tool used to calculate the value of your asset, and thus the much you can borrow. Equipment financing is one of the most common secured business loans. Usually, the equipment you intend to acquire is used as collateral.
The loan-to-value ratio in equipment financing range between 50% and 60%. Another common option is the accounts receivables. Also referred to as invoice financing, unpaid business loans are used to secure the loan. You can qualify for a loan worth 80% to 90% of the total unpaid invoices.
The Bottom Line
You can easily qualify for secured loans. The emphasis is not put on your credit and income, but the value poofs the asset. How much can you qualify for based on your collateral evaluation? Well, most of the lenders use the loan-value ratio to determine the amount a borrower can be eligible for in this regard. Ideally, you should be eligible for an amount that matches the value of the asset used as collateral.