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]