Home is the most common collateral type because it is the most readily available form of collateral. Other collateral types are Cash collateral, Lien on assets, Stock hypothecation, Domiciled payment and Guarantees. Using your home as collateral for loan will translate to you giving the bank authority to sell off your home if you are unable to pay.
Here are 5 hows to consider before you use your home as collateral for loan
1. How come
You need to ask yourself how come you need a loan?. Are you starting a business afresh and you need start up loan? Are you already in business and you need a bank loan to increase your market share and profitability? Or your business won a contract for a project and you need bank assistance to be able to fund the cost of executing the project. Or is the loan an equity refinancing or a fresh mortgage. Answering the how come question will enable your bank to situate your loan in the proper lending bucket and structure the loan to meet your needs. The right loan structure will aid your repayment ability.
2. How much
This is another very important question to ask yourself before approaching your bank for loan. You need to determine the amount that is needed by your business at the time you need loan. Getting a loan higher than what you need will amount to over borrowing and this will have a negative effect on your ability to pay. There is also the temptation of diverting excess cash into purposes other that the loan purpose apart from that cash flow generated from your business may not be able to take care of repayment of an amount more than the business needs.
3. How long
This refers to the term or tenure of the loan. A property structured loan tenure after a good understanding of your purpose and cash flow will aid your ability to fulfill your repayment obligations. The tenure of any loan must align with flow from repayment source.
Loan facilities like Personal Loan, Mortgage, Auto loans and credit card repayments are structured for monthly repayment because the source is from your monthly income. Business loan like Project finance, Commercial mortgage, Term loan, Short tenured loans and Overdraft are structure along with when inflow is expected from the business cycle.
4. How repay
As a bank borrower, you must understand how you want to repay your loan before you approach your bank. Some loan are structured with bullet repayment of principal and interest at the expiration of the loan while some are serviced at regular intervals during the loan tenure. You must understand your cash flow and ensure the loan is structured in a way to align with it so you are not penalized by the bank and consequently destroy your credit record.
5. How safe
The ultimate question you should ask yourself before pledging your property as collateral for a bank loan is how safe is your home in the hands of your bank/lender. While most reputable bank will genuinely allows you all avenue to pay including restructuring of your loan when things go wrong, some others will activate realization and sales of your home immediately you are unable to pay.
So be sure you can afford the loan, ensure you check all documents you are about to sign and sign only after you have had a very good understanding of the terms and conditions of the loan also ensure you get the copies of all the documents you have signed.