Lån med sikkerhet i bolig: How do secured debentures work?
Secured debentures can help people access much-needed funds or make big purchases like a new car or a house. Find out how they work.
These type of loans usually have less stringent qualification requirements compared to their unsecured counterpart. By pledging valuable assets, people can get financing while keeping the interest rate pretty low.
Lending firms or financial institutions also face less risk when providing secured credit because they can repossess or foreclose on the collateral if the borrower doesn’t pay their debt.
What are secured debentures?
Secured debentures are collateralized or secured by assets like cash accounts, cars, or real estate. In most instances, it is secured by underlying assets being financed, such as a car or i bolig; alternatively, you may be able to pledge other valuable assets as collateral, such as valuable collectibles, antiques, or investments.
If you default on secured debentures, lending firms or financial institutions can foreclose on, repossessions, or even seize their assets to recoup the payable balance. Because of this, secured debentures pose less risk to financial institutions and, therefore, usually come with much lower interest rates (IRs), as well as borrower requirements compared to their unsecured counterpart.
For instance, in the case of unsecured versus secure personal credits, borrowers with good credit scores can qualify for unsecured loans with low IR without pledging collaterals. Another applicant for the same debenture might not be eligible and need to rely on secured options since they present more risk.
One kind of debenture is not better than the other, but it is imperative to know all the available options before signing the contract.
How do secured debentures work?
Secured debentures (SLs) let you access a lump sum of funds to cover everything from property improvement projects to the purchase of a house or a car. People usually get these credits from conventional banks, online lending firms, credit unions, mortgage lending companies, and car dealerships.
Even though these things are less risky for financial institutions, the application process usually needs a hard credit check – although some financial institutions offer the ability to prequalify using soft credit checks. And, while SL balances accrue IRs like other credits, people may access lower APR or Annual Percentage Rate compared to what is available with unsecured debentures.
Once you qualify for SLs, lending firms place liens on your collateral. It will give the financial institution the right to seize the approved collateral if you default on these loans. The value of these collaterals should be more than or equal to the loan balance to improve the financial institution’s chances of recovering its funds.
What can you use as collateral on secured debentures?
Usually, the kind of collateral needed for SLs is related to the underlying purposes of that debentures. It is famously illustrated by housing loans, wherein the mortgage is collateralized by the property being financed.
With that being said, the right collateral can also vary on a number of factors, such as the lending firm as well as the credit amount. Common forms of guarantee include:
- Real estates like commercial buildings, houses, equity in real estate, and land
- Bank accounts such as money market, certificates of deposit (CD), savings, and checking accounts
- Investments like bonds, mutual funds, and stocks
- Insurance policies like life insurance
- Vehicles ranging from boats, motorcycles, and Sports Utility Vehicles to trucks and cars
- Other valuable assets, such as precious metals, collectibles, and coins
- Inventory, equipment, machinery, and other business assets
What happens if borrowers default on SLs?
If you default on your SL, lending firms can seize collateral to get back outstanding balances on the debenture. In the case of a housing loan, this involves filing foreclosure actions against borrowers. If you default on auto loans, lending firms can repossess financed vehicles.
In general, the value of underlying loan collaterals needs to exceed or at least meet the debenture amount – this will improve lenders’ chance of limiting their losses in cases of defaults. But there are particular circumstances under which the debenture balance can exceed the collateral’s value.
For instance, if you purchase a house at the peak of the housing market and default on your home loan during the economic downturn, the financial institution may not be able to get back the home loan amount through foreclosure sales.
Where the sale of collateral does not cover all the outstanding balances of loans, lending firms can attempt to recover the remaining amount by filing for deficiency judgments.
If you have SLs, a thing you may default on, there are simple steps you can take to limit the blowback on you credit score. You need to contact your financial institution or lending firm immediately, check your budget, as well as prioritize SL payments, so you do not lose your valuable collateral like cars or houses.
Sis different kinds of SLs
Home and auto debentures are perhaps the most popular SL, but there are a couple of other financing options that may need guarantees. Here are six of the most popular kinds of SLs.
1) Home debentures
Home debentures or mortgages are common types of loans used to finance purchases of homes or other real estates. These credits are secured by financed properties. It means lending firms can foreclose in cases of borrower defaults.
HELOC or Home Equity Line of Credit is a revolving debenture that is secured by borrowers’ equity in their houses. Borrowers can use funds on an as-needed basis.
Like HELOC, HELs or Home Equity Loans are collateralized by borrowers’ home equities. But with HELs, borrowers receive a lump sum of funds, on which IRs start accruing immediately.
4) Car loans
These things are guaranteed by the car being financed. To help protect their interest in the bond, lending firms hold titles to financed cars until the debenture is paid 100%.
5) Guaranteed personal credits
These things let you access funds that can be used for personal expenses such as medical expenses, vacation costs, or home improvement expenses.
6) Credit cards
With credit cards, you can get access to credit lines to the number of funds you commit as security deposits. It makes these things an excellent option if you are trying to improve your credit score.