Applying for Secured Loans

The process of applying for secured loans is often very different from that used for other kinds of credit applications.

In a traditional credit application, the emphasis is usually placed upon the borrower. The creditor or lender tries to determine if the borrower is creditworthy. This is usually done by running a credit check on the borrower.

A credit check involves running a credit report through the big three credit bureaus. The bureaus keep records of a person's credit history. The lender checks these to see if the applicant's file contains negative information such as unpaid debts or late payments. The lender may also check the individual's credit score, which is supposed to predict his likelihood of defaulting on a loan.

A traditional credit application also involves a check of a person's income. The applicant is usually asked to present proof of income in the form of bank records or proof of employment. Business owners may have to turn over records to prove their enterprise is generating sufficient cash flow to pay the loan. Credit applications for secured loans usually involve these steps and more.

Proof of Collateral

Applying for Secured Loans

The major difference in credit applications for secured loans is that the borrower will have to present proof of collateral. A secured loan lender usually wants to know four things about the collateral:

  • Does the collateral actually exist?
  • Does the borrower have legal ownership and possession of the collateral?
  • Does the value of the collateral equal or exceed the amount of the loan?
  • Are there any other loans or liens against the collateral?

In the cases of secured loans based on real estate, lenders usually run a title search. This is designed to see if there are any liens or claims of ownership against the real estate involved. These can include mechanics' liens and tax liens.

The total value of liens against a property can reduce the equity or value in it available for lending. In some cases, the amount borrowed against a piece of property can exceed its value.

Appraisal

An important part of the application process for secured loans is called appraisal. In an appraisal, an expert examines the collateral to see if it has sufficient value to be used as security for the loan.

In real estate secured loans, lenders can call in expert appraisers who make a career of conducting such evaluations. In other kinds of loans, the lender may simply check the item's value against market value. An example of this is checking a car's "blue book value" for purposes of auto pawn.

Collateral Value vs. Amount Lent

In most cases, the value of the collateral offered will have to exceed the amount lent. The reason for this is to ensure the lender a profit if he has to repossess the collateral and sell it.

The amount available for secured loans on many older items can often be very small. In some cases, it is possible to borrow a large amount of money against collector's items or valuables made from precious metals such as gold, platinum or silver.

Even in those cases, the amount available for lending will usually be less, and in some cases substantially less, than the value of the collateral.

Applying for Secured Loans without a Credit Check

It is possible to apply for secured loans without a credit check. It is also often possible for those with bad credit to get secured loans. The reason for this is that the security provided by the collateral lessens or eliminates the risk the lender is taking when making such a loan.

To obtain a secured loan without a credit check, a borrower will usually have to present proof of income. Any regular source of income that is sufficient to pay off the loan can be used. This includes business income, salaries and government benefit payments. In many cases, the lender will want to see a bank statement or some other paperwork that verifies the income.

The lender will also want to examine the collateral in order to appraise it and verify the value. In most cases, it is not possible to get a secured loan without a credit check without submitting to some sort of appraisal.

There are also some lenders, including inventory lenders and pawnbrokers, who will take possession of the collateral for secured loans. This eliminates the risk of not being able to take possession of the collateral later and helps ensure repayment of the loan.

A final requirement for some secured loan applications is an automatic payment arrangement. This usually allows a lender to take loan repayment out of the borrower's bank account automatically in the future. Almost all online-secured loans will require an automatic payment arrangement.

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