A secured home improvement loan is a loan granted to a borrower once some form of collateral has been posted to guarantee the repayment of the loan. Most of the time, the collateral is the home or the equity in the home, but it may also be another asset such as a vehicle or business. In order to understand if the loan you’re getting is a good deal, it’s important to make sure you understand certain terms associated with the loan. Once you understand the terms of the loan, you will be able to determine just how good of a deal you are getting.
The interest rate is generally one of the first things you hear about a loan and what most people are highly concerned with. The interest rate is generally determined by your credit score. In other words, it depends upon how much of a risk the lender is taking when lending to you. By providing the collateral in exchange for the loan, you are greatly reducing the overall risk for the lender. If you don’t pay the loan, they get the house, the car, the business or whatever it was you put up for the loan. It’s a win-win situation for them, so the interest rate should be reasonably low compared to those on unsecured home improvement loans.
Terms of Collateral
This is an area very important to understand because it determines how quickly and under what circumstances the bank can come after your collateral. Make sure you know the terms well to avoid any misunderstandings. There are some cases in which the bank will come after the collateral within 30 days, whereas some lenders may wait until 90 days have passed with no payment.
The Value of Collateral
To determine the value of the collateral that secures the loan, some form of assessment will be done by the lender. For a home, a licensed real estate appraiser will come look at the home and compare it to similar homes in the area. For a business, the lender will likely want to see sales and profit records for the last couple of years, along with a business plan. For a vehicle, the lender will likely seek some sort of vehicle history report, along with a blue book value. The assessed value of the collateral will likely determine the loan amount.
Length of the Loan and Monthly Payment
Make sure you understand the monthly payment amount and the number of months this loan payment will be required to fulfill your loan obligation. When you go for a longer loan term, you will generally have a lower monthly payment, but your interest rate will be higher, so you’re paying more for the money. Crunch some numbers to determine the best scenario for you and the lender.
Penalties and Fees
Take time up front to understand the fees and penalties for paying the loan off early, for missing payments, for making a late payment, for refinancing the loan, etc. If you don’t consider these things until after you’ve secured the loan and it becomes apparent that you’re faced with a financially trying situation, it can be difficult to manage.