Other factors entering the decision-making
process are whether the lender may have
already invested in a competing business and
how much competition there is in your market.
Be prepared to tell the lender how you plan to
deal with these conditions, how you have
assessed the market, and how your business
will weather economic changes.
Finally, the person handling your loan has their own personal
conditions. I like to call these the “bad cup of coffee” factors after one of
my law professors. The professor claimed to give lower exam grades
when he had a bad cup of coffee while grading.
These conditions range from the lender’s personal mood to their track
records when making loans. If he is looking for a bonus for number of
loans written, he may be more likely to approve yours. If she has
recently made a number of bad lending decisions, she may be gun-shy
about risk taking and deny your loan.
Even seemingly unrelated factors touch your loan decision. Fights with
a spouse, poor weather, allergy attacks and hunger are among a whole
list of personal issues that may be challenging your banker when you
meet with them.
You can’t improve conditions. However, you can predict and respond to
them, manage and exploit them. By researching some of the systematic
risks that may be of concern to the lender, you can preempt them. Be prepared to talk about how your business will survive seasonal trends,
or profits even with the vagaries of your particular clientele. Come
armed with good answers to why your loan fits into the lender’s overall
loan profile and goals.
Monday, December 04, 2006
Being in the right place at the right time -26
Conditions, simply put, refer to the economic climate of the
marketplace. Consider this role-play:
Paulie: Donna, may I borrow $20?
Donna: Let me check my wallet
Notice the difference? This is the only C of credit that isn’t about you,
the borrower, and you cannot control directly.
Conditions are factors that range from the global economic climate to
the positive or negative influences on the particular lender the day you
apply for a loan with them. Other factors are the tightness and
availability of money due to controls by the Federal Reserve, the
prevailing interest rates, or the economic cycles of recession or growth.
While you cannot control the economic conditions, you can study,
predict, interpret and even mitigate them.
Study the leading economic indicators for the national economic trends.
New housing starts or building permits indicate an improving economy.
The increase of interest rates and tightening of the money supply may
signal fears of inflation. Mid-swing indicators such as new hires and
fires can show you the general trend of the economy.
Conditions include factors intrinsic to the
lending business or of a particular bank or
branch of the bank that are also conditions
that are considered in a lending decision. The
bank’s particular balance sheet requirements,
goals, and the underwriting requirements are
part of the bank’s conditions. If the bank doesn’t make a loan of a particular kind such as loans on
prefabricated homes, this particular condition, no matter how good the
other Cs are for you as a borrower, you won’t get that loan. This can
also help you. If a bank is looking to expand their business in a
particular area, such as small business loans, you may get a positive
lending decision because you were in the right place at the right time. If
the conditions are right the lender may overlook some small weaknesses
in your strength as a borrower.
marketplace. Consider this role-play:
Paulie: Donna, may I borrow $20?
Donna: Let me check my wallet
Notice the difference? This is the only C of credit that isn’t about you,
the borrower, and you cannot control directly.
Conditions are factors that range from the global economic climate to
the positive or negative influences on the particular lender the day you
apply for a loan with them. Other factors are the tightness and
availability of money due to controls by the Federal Reserve, the
prevailing interest rates, or the economic cycles of recession or growth.
While you cannot control the economic conditions, you can study,
predict, interpret and even mitigate them.
Study the leading economic indicators for the national economic trends.
New housing starts or building permits indicate an improving economy.
The increase of interest rates and tightening of the money supply may
signal fears of inflation. Mid-swing indicators such as new hires and
fires can show you the general trend of the economy.
Conditions include factors intrinsic to the
lending business or of a particular bank or
branch of the bank that are also conditions
that are considered in a lending decision. The
bank’s particular balance sheet requirements,
goals, and the underwriting requirements are
part of the bank’s conditions. If the bank doesn’t make a loan of a particular kind such as loans on
prefabricated homes, this particular condition, no matter how good the
other Cs are for you as a borrower, you won’t get that loan. This can
also help you. If a bank is looking to expand their business in a
particular area, such as small business loans, you may get a positive
lending decision because you were in the right place at the right time. If
the conditions are right the lender may overlook some small weaknesses
in your strength as a borrower.
Creating Your Net Worth Statement -25
Net Worth Statement
Assets Liabilities
Current Liquid Assets Current Liabilities
Checking account 3,500.00 Capital Gains tax 1,500.00
Savings account 200.00 Salary Advance 2,300.00
Stocks/Bonds (E-trade) 4,000.00
Total Liquid Assets 7,700.00 Total Current Liabilities 3,800.00
Fixed Assets Short –Term Liabilities
Vehicles 4,500.00 Auto Loan 4,750.00
Home 84,000.00 Credit Cards 12,500.00
Personal Property 84,000.00 Business Loan 42,250.00
Total Fixed Assets 172,500.00 Total ST Liabilities 59,500.00
Deferred Assets Long-Term Liabilities
Promissory Notes 2,000.00 Student Loans 44,000.00
IRA 5,775.00 Mortgage 64,200.00
50% Interest Business 12,130.00
Total Deferred Assets 19,905.00 Total LT Liabilities 108,200.00
Total Assets 200,105.00 Total Liabilities 227,200.00
NET WORTH <$27,095.00>
Notice that the net worth was reported as a negative number. It is
estimated that one in every 10 American households has a zero or
negative net worth. These are primarily college students, recent college
graduates, or retirees on a fixed income.
The profile above is typical of a new investor. This person has gone to
college, as evidenced by the student loan liability. They have recently
purchased their home. Note the outstanding home mortgage is 77%
value of the home, indicating a recent home purchase, possibly in the
last two years. The person also signed personally for a business loan to start a
business in which they are a 50% partner. This is not uncommon.
Most of us will have to sign personally on business accounts for the first
couple of years as our business gets started.
You can improve your capital, and thus your net worth statement, in a
variety of ways. The first is simply to increase your savings and
decrease your spending. Each time you do this, more of what you earn
will appear in the assets column of your net worth statement, and tip
your net worth figure farther to the positive side.
Saving more goes hand in hand with reducing your debt. Debt
reduction lowers your liabilities and thus increases your net worth.
Learn more about strategically decreasing your debt and saving more in
Chapter 11 called “Dividing debt and conquering credit.”
The second way to have the most impact in improving your net worth
statement is to purchase undervalued assets. When you get a deal on
an asset and buy it for less than its value, you get an instant boost to
your asset column.
Assets Liabilities
Current Liquid Assets Current Liabilities
Checking account 3,500.00 Capital Gains tax 1,500.00
Savings account 200.00 Salary Advance 2,300.00
Stocks/Bonds (E-trade) 4,000.00
Total Liquid Assets 7,700.00 Total Current Liabilities 3,800.00
Fixed Assets Short –Term Liabilities
Vehicles 4,500.00 Auto Loan 4,750.00
Home 84,000.00 Credit Cards 12,500.00
Personal Property 84,000.00 Business Loan 42,250.00
Total Fixed Assets 172,500.00 Total ST Liabilities 59,500.00
Deferred Assets Long-Term Liabilities
Promissory Notes 2,000.00 Student Loans 44,000.00
IRA 5,775.00 Mortgage 64,200.00
50% Interest Business 12,130.00
Total Deferred Assets 19,905.00 Total LT Liabilities 108,200.00
Total Assets 200,105.00 Total Liabilities 227,200.00
NET WORTH <$27,095.00>
Notice that the net worth was reported as a negative number. It is
estimated that one in every 10 American households has a zero or
negative net worth. These are primarily college students, recent college
graduates, or retirees on a fixed income.
The profile above is typical of a new investor. This person has gone to
college, as evidenced by the student loan liability. They have recently
purchased their home. Note the outstanding home mortgage is 77%
value of the home, indicating a recent home purchase, possibly in the
last two years. The person also signed personally for a business loan to start a
business in which they are a 50% partner. This is not uncommon.
Most of us will have to sign personally on business accounts for the first
couple of years as our business gets started.
You can improve your capital, and thus your net worth statement, in a
variety of ways. The first is simply to increase your savings and
decrease your spending. Each time you do this, more of what you earn
will appear in the assets column of your net worth statement, and tip
your net worth figure farther to the positive side.
Saving more goes hand in hand with reducing your debt. Debt
reduction lowers your liabilities and thus increases your net worth.
Learn more about strategically decreasing your debt and saving more in
Chapter 11 called “Dividing debt and conquering credit.”
The second way to have the most impact in improving your net worth
statement is to purchase undervalued assets. When you get a deal on
an asset and buy it for less than its value, you get an instant boost to
your asset column.
Creating Your Net Worth Statement -24
Gather all of your financial records.
Compile your assets. Assets are anything of value that you own. Some
examples of the types of documents you are looking for:
Statements for savings and checking accounts, investment and
securities accounts, 401(k), or IRAs;
Deeds and titles to real estate, vehicles and equipment;
Notes or certificates of paper assets, stock or partnership interests; and
Appraisals of collectibles and other personal property.
Accounts receivable and available lines of credit can also be considered
assets, as long as the entire line of credit balance and the cost of
production for any future accounts receivable are included as liabilities.
Classify your assets into three separate classes: liquid assets, fixed
assets and deferred assets. Fixed assets can be sold, but not easily,
and will often need to be replaced. Deferred assets are ones that you
can’t access immediately such as retirement accounts and business
ownership interests.
Compile your liabilities. Liabilities are any thing that you owe. You’ll be
gathering statements for mortgages, credit cards, school loans, auto
loans, personal loans, other promissory notes payable, and estimated
tax liabilities. Classify these as current liabilities (have to be paid this
year) short-term (paid in a few years) and long-term liabilities.
To calculate your net worth, take the sum of all your assets and
subtract your total liabilities. The resulting figure is your net worth.
Your resulting financial statement will look something like this: See the next post.
Compile your assets. Assets are anything of value that you own. Some
examples of the types of documents you are looking for:
Statements for savings and checking accounts, investment and
securities accounts, 401(k), or IRAs;
Deeds and titles to real estate, vehicles and equipment;
Notes or certificates of paper assets, stock or partnership interests; and
Appraisals of collectibles and other personal property.
Accounts receivable and available lines of credit can also be considered
assets, as long as the entire line of credit balance and the cost of
production for any future accounts receivable are included as liabilities.
Classify your assets into three separate classes: liquid assets, fixed
assets and deferred assets. Fixed assets can be sold, but not easily,
and will often need to be replaced. Deferred assets are ones that you
can’t access immediately such as retirement accounts and business
ownership interests.
Compile your liabilities. Liabilities are any thing that you owe. You’ll be
gathering statements for mortgages, credit cards, school loans, auto
loans, personal loans, other promissory notes payable, and estimated
tax liabilities. Classify these as current liabilities (have to be paid this
year) short-term (paid in a few years) and long-term liabilities.
To calculate your net worth, take the sum of all your assets and
subtract your total liabilities. The resulting figure is your net worth.
Your resulting financial statement will look something like this: See the next post.
It’s not who you know it’s what you own -23
If collateral is the specific asset used to secure the loan, capital is the
sum of all your assets. It is exemplified in the role-play below.
Paulie: Donna, may I borrow $20, it’s Sunday and I
can’t get to the bank.
Donna: Let me see your bank statement.
Capital is defined as the combined value of what you own with a bias
towards liquidity. Lenders are reluctant to fund a loan unless they have
concrete evidence you have sizeable financial assets to fall back on.
Lenders take comfort in knowing you possess valuable things or have
piles of cash you can use if you have a hard time repaying the loan.
Lenders will want to see that you also have a lot to lose. For business
loans, lenders want to know that you have personally made a financial
commitment to the business. Lenders know that the amount of money
someone has at stake in the event of default is directly related to how
hard they will work to pay the loan as agreed.
Lenders will look to your personal resources to provide as much of the
needed capital as you can afford to put at risk. Depending on the capital
needs, you cannot expect any lender to loan 80 percent or more of the
capital, as they may for a home or investment real estate. It is also
possible to borrow the capital of others to use to secure a loan. The
closer the asset is to cash, the more liquid it is. Liquid assets that don’t
change in value are the best kinds of capital for the purposes of getting
a loan. Non-liquid assets that are relatively stable, like real estate, are
another good source. Non-liquid assets of a volatile nature such as
stocks or collectables are the least desirable to a lender.
You can improve your capital simply by acquiring more of it, or
increasing the value of what you have using the techniques discussed in
the section on collateral. You can improve your capital by making concerted efforts to increase your savings and decrease spending. I will
go into some specific techniques for living below your means in Chapter
11 and the appendices.
For business loans, you can improve your capital through developing
accounts receivable from customers, or raising capital from
stockholders.
Your primary method of proving your capital to a lender is through your
personal or business net worth statements. The net worth statement
lists the value of your assets, subtracts your outstanding liabilities, and
comes up with the number that is referred to as net worth. Standard
business and personal net worth statements calculate assets by adding
your purchase price and capital improvements, then subtracting
depreciation to arrive at their worth.
You are going to create a net worth statement that is “marked to
market”. This is a statement that reflects the present value of your
assets. For real estate, this is the estimated market value. For an
automobile, consider the market value according to the industry
standard, the Kelly Blue Book.* Assets such as diamond rings and stamp or coin collections also appreciate in value. Consider getting a
new appraisal every couple of years for valuable personal property.
Personal property. Your lender will always assume that your net worth
includes an evaluation of your personal property; so to refrain from
making a statement of the worth of your personal property is a financial
mistake. Use the same rule of thumb that a lender does. Personal
property is usually equal to the value of the dwelling. The lender may
also use the number that you have the property insured for.
Coincidentally, most insurance companies also use the personal
property equals the house value rule of thumb. If you have jewelry or
an expensive collection that boosts this estimate above the basic rule,
get an independent appraisal, a separate insurance rider for the item,
and list it separately on your net worth statement.
sum of all your assets. It is exemplified in the role-play below.
Paulie: Donna, may I borrow $20, it’s Sunday and I
can’t get to the bank.
Donna: Let me see your bank statement.
Capital is defined as the combined value of what you own with a bias
towards liquidity. Lenders are reluctant to fund a loan unless they have
concrete evidence you have sizeable financial assets to fall back on.
Lenders take comfort in knowing you possess valuable things or have
piles of cash you can use if you have a hard time repaying the loan.
Lenders will want to see that you also have a lot to lose. For business
loans, lenders want to know that you have personally made a financial
commitment to the business. Lenders know that the amount of money
someone has at stake in the event of default is directly related to how
hard they will work to pay the loan as agreed.
Lenders will look to your personal resources to provide as much of the
needed capital as you can afford to put at risk. Depending on the capital
needs, you cannot expect any lender to loan 80 percent or more of the
capital, as they may for a home or investment real estate. It is also
possible to borrow the capital of others to use to secure a loan. The
closer the asset is to cash, the more liquid it is. Liquid assets that don’t
change in value are the best kinds of capital for the purposes of getting
a loan. Non-liquid assets that are relatively stable, like real estate, are
another good source. Non-liquid assets of a volatile nature such as
stocks or collectables are the least desirable to a lender.
You can improve your capital simply by acquiring more of it, or
increasing the value of what you have using the techniques discussed in
the section on collateral. You can improve your capital by making concerted efforts to increase your savings and decrease spending. I will
go into some specific techniques for living below your means in Chapter
11 and the appendices.
For business loans, you can improve your capital through developing
accounts receivable from customers, or raising capital from
stockholders.
Your primary method of proving your capital to a lender is through your
personal or business net worth statements. The net worth statement
lists the value of your assets, subtracts your outstanding liabilities, and
comes up with the number that is referred to as net worth. Standard
business and personal net worth statements calculate assets by adding
your purchase price and capital improvements, then subtracting
depreciation to arrive at their worth.
You are going to create a net worth statement that is “marked to
market”. This is a statement that reflects the present value of your
assets. For real estate, this is the estimated market value. For an
automobile, consider the market value according to the industry
standard, the Kelly Blue Book.* Assets such as diamond rings and stamp or coin collections also appreciate in value. Consider getting a
new appraisal every couple of years for valuable personal property.
Personal property. Your lender will always assume that your net worth
includes an evaluation of your personal property; so to refrain from
making a statement of the worth of your personal property is a financial
mistake. Use the same rule of thumb that a lender does. Personal
property is usually equal to the value of the dwelling. The lender may
also use the number that you have the property insured for.
Coincidentally, most insurance companies also use the personal
property equals the house value rule of thumb. If you have jewelry or
an expensive collection that boosts this estimate above the basic rule,
get an independent appraisal, a separate insurance rider for the item,
and list it separately on your net worth statement.
The third way to repay a lender -22
Jewelry or other personal property. By law, a lender can’t ask you to
pledge your clothes, furniture or other personal belongings for a loan
unless these are the specific items you are buying with credit. However,
this doesn’t stop you from volunteering these assets as collateral. The
values of these items are most often shown by the independent
appraisal method. Like with real estate, get a few appraisals and use
the best.
Stocks. When you secure a loan with stocks, it is called margining. The
margin interest rate offered by brokerage houses is usually an
attractive, competitive rate. Federal rules prohibit margining stocks
above 50% of the current market value. So for purposes of lending,
your stocks only represent half their present trading value. When you
borrow against your stocks, your broker will reserve the right to ask you
to deposit more money into your account if the stock price dips too low.
This is called a maintenance margin call. Failure to make a margin call
will result in having your stocks sold to cover the costs, even if they get
sold at a loss.
Paper Assets. Promissory notes and mortgages can also be used to
secure loans. You can show the value of a note by showing the terms of
the note and proof of performance. Likewise, you can use account receivable and forward contracts to secure a line. The stronger your
proof of the payee’s performance is, the greater the value of the paper
asset.
Whole life insurance. You can borrow against the cash surrender value
of your whole life insurance policy, up to 95%. The rates are generally
very competitive since this is a secure investment for the insurance
company.
pledge your clothes, furniture or other personal belongings for a loan
unless these are the specific items you are buying with credit. However,
this doesn’t stop you from volunteering these assets as collateral. The
values of these items are most often shown by the independent
appraisal method. Like with real estate, get a few appraisals and use
the best.
Stocks. When you secure a loan with stocks, it is called margining. The
margin interest rate offered by brokerage houses is usually an
attractive, competitive rate. Federal rules prohibit margining stocks
above 50% of the current market value. So for purposes of lending,
your stocks only represent half their present trading value. When you
borrow against your stocks, your broker will reserve the right to ask you
to deposit more money into your account if the stock price dips too low.
This is called a maintenance margin call. Failure to make a margin call
will result in having your stocks sold to cover the costs, even if they get
sold at a loss.
Paper Assets. Promissory notes and mortgages can also be used to
secure loans. You can show the value of a note by showing the terms of
the note and proof of performance. Likewise, you can use account receivable and forward contracts to secure a line. The stronger your
proof of the payee’s performance is, the greater the value of the paper
asset.
Whole life insurance. You can borrow against the cash surrender value
of your whole life insurance policy, up to 95%. The rates are generally
very competitive since this is a secure investment for the insurance
company.
The third way to repay a lender -21
Ownership is shown through the deed, but the way value is shown depends upon the purpose and length of ownership. For residential real
estate, until the property is seasoned (held for a period of time, usually
one year) its value is assumed to be the sum of the acquisition costs
and capital improvements. To increase the value of real estate during
this period, your best option is to make capital improvements using a
rebate strategy. Rebates are an extremely common business practice.
It works like this: you have your contractor charge you his retail prices
for the improvements and give you a “good customer” rebate for some of
the costs. The full retail price is what is used for the value calculation.
After a property is seasoned, the value is most often shown by an
independent appraisal. Hence, one way to increase the value of the real
estate is to get a number of appraisals, and use the best one. Do not
inflate appraisals, simply get a second or third opinion and use the most
favorable one. You can also show the value, much like an appraiser
does, by providing your own market comparables. These are other
houses with similar features that have sold in your area recently.
Once real property is valued, the lender will
only take a portion of that value to determine
the value of the asset as collateral. Typically
their lending limits set this at 70% for real
property. The exception may be your primary
residence.
Your lender doesn’t want to assume the risk
of giving you access to too much of your
collateral’s equity. If you have borrowed 100% of an asset’s value, it costs you nothing to cut your losses and
“walk away” from the asset if you fall upon financial difficulties.
Lenders are willing to increase that risk with your primary residence
because moving from your home is a tougher decision to make.
Rental real estate can also be valued using the income method. There
are locally varying formulas that are used to determine the value of the
property as an income property. The rents can be used to determine
another C—Capacity.
estate, until the property is seasoned (held for a period of time, usually
one year) its value is assumed to be the sum of the acquisition costs
and capital improvements. To increase the value of real estate during
this period, your best option is to make capital improvements using a
rebate strategy. Rebates are an extremely common business practice.
It works like this: you have your contractor charge you his retail prices
for the improvements and give you a “good customer” rebate for some of
the costs. The full retail price is what is used for the value calculation.
After a property is seasoned, the value is most often shown by an
independent appraisal. Hence, one way to increase the value of the real
estate is to get a number of appraisals, and use the best one. Do not
inflate appraisals, simply get a second or third opinion and use the most
favorable one. You can also show the value, much like an appraiser
does, by providing your own market comparables. These are other
houses with similar features that have sold in your area recently.
Once real property is valued, the lender will
only take a portion of that value to determine
the value of the asset as collateral. Typically
their lending limits set this at 70% for real
property. The exception may be your primary
residence.
Your lender doesn’t want to assume the risk
of giving you access to too much of your
collateral’s equity. If you have borrowed 100% of an asset’s value, it costs you nothing to cut your losses and
“walk away” from the asset if you fall upon financial difficulties.
Lenders are willing to increase that risk with your primary residence
because moving from your home is a tougher decision to make.
Rental real estate can also be valued using the income method. There
are locally varying formulas that are used to determine the value of the
property as an income property. The rents can be used to determine
another C—Capacity.
The third way to repay a lender -20
Collateral is the asset that is used to secure the loan. It is evidenced in
his role-play:
Paulie: Donna, may I borrow $20?
Donna: Yes, if I can hold your Boiler Room
Collector’s Edition DVD until you repay me.
Collateral is the pledged property that a lender may use to meet the loan
obligations in the event of default. Collateral is often called the third
way to pay. For the credit millionaire, lenders first look to the
nvestment for repayment, then to the borrower, then finally to the
iquidation of the property.
Then lenders will consider taking the property that’s pledged for the
oan to sell it and recover their losses.
When considering potential collateral, lenders ask the question, “If I
must foreclose, will the collateral cover the loan?” They will want to be
assured if the collateral is sold it will be simple and fast and sufficient to
cover the loan obligation. To ensure this, the lender will want the asset
to be adequately insured and may only loan a certain percentage of the
value of collateral. Lenders know from experience a borrower will try
much harder to make their payments if they have some financial risk or
actual cash loss at stake.
Lenders take the collateral in lieu of performance of the loan through
foreclosure or repossession. Familiar examples of this are a mortgage
foreclosure or automobile repossession.
There are many things that a lender can look to for collateral, from real
estate to the cash value of life insurance policies. When using
collateral, consider carefully the consequences of the worst-case
scenario if you cannot repay the loan. You may be forced to liquidate
and sell or give up your property. If your loan is too high compared to
the value of the property, the sale of the property may not be enough to
cover the obligations. In other words, you may lose your property and
still owe money.
Following are a few of the assets that can be collateralized and the
documents used to prove and improve their worth.
Cash. You can secure a loan with a certificate of deposit or bank
account. This is the only asset that you are likely to get a loan against
the full value of the deposit. In the event of default, the bank will
simply seize the funds for full satisfaction of the loan.
Real Estate. Real estate is the most commonly known form of collateral.
Real estate that already has debt on it can still be used as collateral.
For many people, the most tempting form of collateral you can use is
he equity in your home, that is, the difference between your home’s
alue and what you owe. Because it’s very easy to borrow against the
quity in your home, it’s often the first place that business owners and
nvestors go to get funds for their activities.
There are three main ways to tap into your home’s equity: through a
ash-out refinance, a second mortgage or a home equity line of credit
“HELOC”).
When you refinance your home, you borrow up to 80-90% of the value
of your home, the original mortgage is paid, you receive cash at the
closing and you have a new fully amortized mortgage placed on your
property. With a second mortgage, you get a lump sum payment for
your equity, and an additional fully amortized loan is added to your
home, leaving your original mortgage intact. A HELOC gives you access
to convert your equity to cash. However, you don’t have to take the
cash up front. Rather, you can use it as you need it. Additionally, you
usually make interest-only payments on the funds you are using. It’s
like a credit card that is secured by your home.
Ownership is shown through the deed, but the way value is shown ...[ continue to next post]
his role-play:
Paulie: Donna, may I borrow $20?
Donna: Yes, if I can hold your Boiler Room
Collector’s Edition DVD until you repay me.
Collateral is the pledged property that a lender may use to meet the loan
obligations in the event of default. Collateral is often called the third
way to pay. For the credit millionaire, lenders first look to the
nvestment for repayment, then to the borrower, then finally to the
iquidation of the property.
Then lenders will consider taking the property that’s pledged for the
oan to sell it and recover their losses.
When considering potential collateral, lenders ask the question, “If I
must foreclose, will the collateral cover the loan?” They will want to be
assured if the collateral is sold it will be simple and fast and sufficient to
cover the loan obligation. To ensure this, the lender will want the asset
to be adequately insured and may only loan a certain percentage of the
value of collateral. Lenders know from experience a borrower will try
much harder to make their payments if they have some financial risk or
actual cash loss at stake.
Lenders take the collateral in lieu of performance of the loan through
foreclosure or repossession. Familiar examples of this are a mortgage
foreclosure or automobile repossession.
There are many things that a lender can look to for collateral, from real
estate to the cash value of life insurance policies. When using
collateral, consider carefully the consequences of the worst-case
scenario if you cannot repay the loan. You may be forced to liquidate
and sell or give up your property. If your loan is too high compared to
the value of the property, the sale of the property may not be enough to
cover the obligations. In other words, you may lose your property and
still owe money.
Following are a few of the assets that can be collateralized and the
documents used to prove and improve their worth.
Cash. You can secure a loan with a certificate of deposit or bank
account. This is the only asset that you are likely to get a loan against
the full value of the deposit. In the event of default, the bank will
simply seize the funds for full satisfaction of the loan.
Real Estate. Real estate is the most commonly known form of collateral.
Real estate that already has debt on it can still be used as collateral.
For many people, the most tempting form of collateral you can use is
he equity in your home, that is, the difference between your home’s
alue and what you owe. Because it’s very easy to borrow against the
quity in your home, it’s often the first place that business owners and
nvestors go to get funds for their activities.
There are three main ways to tap into your home’s equity: through a
ash-out refinance, a second mortgage or a home equity line of credit
“HELOC”).
When you refinance your home, you borrow up to 80-90% of the value
of your home, the original mortgage is paid, you receive cash at the
closing and you have a new fully amortized mortgage placed on your
property. With a second mortgage, you get a lump sum payment for
your equity, and an additional fully amortized loan is added to your
home, leaving your original mortgage intact. A HELOC gives you access
to convert your equity to cash. However, you don’t have to take the
cash up front. Rather, you can use it as you need it. Additionally, you
usually make interest-only payments on the funds you are using. It’s
like a credit card that is secured by your home.
Ownership is shown through the deed, but the way value is shown ...[ continue to next post]
What you can’t see helps you—invisible debts -19
A third way to help your ratios is to consider invisible debts. Some
lenders don’t report your debt to the three major credit bureaus. Since
the debt doesn’t appear on your credit report, it won’t affect your credit
score. If you can move a balance from a reporting debt to a non-
reporting debt, this new invisible debt will improve your capacity as
calculated by your credit reporting records.
Lines of credit at local stores, personal notes and other sources of non-
reporting debt can help you by making your overall ratios smaller when
your credit report is the chief method the lender uses to determine your
financial worthiness. Obviously, if a more detailed balance sheet is
requested, those debts should appear there.
However, the danger with this strategy is building up too many debts
and becoming over-indebted. Remember what the credit report doesn’t
know can still hurt you. When you accumulate invisible debts, use
them wisely. By paying these debts on time you will improve your
character, your reputation for paying your debts and you gain a source
for meaningful referrals.
lenders don’t report your debt to the three major credit bureaus. Since
the debt doesn’t appear on your credit report, it won’t affect your credit
score. If you can move a balance from a reporting debt to a non-
reporting debt, this new invisible debt will improve your capacity as
calculated by your credit reporting records.
Lines of credit at local stores, personal notes and other sources of non-
reporting debt can help you by making your overall ratios smaller when
your credit report is the chief method the lender uses to determine your
financial worthiness. Obviously, if a more detailed balance sheet is
requested, those debts should appear there.
However, the danger with this strategy is building up too many debts
and becoming over-indebted. Remember what the credit report doesn’t
know can still hurt you. When you accumulate invisible debts, use
them wisely. By paying these debts on time you will improve your
character, your reputation for paying your debts and you gain a source
for meaningful referrals.
Subscribe to:
Posts (Atom)
