Lenders more readily approve secured loans than unsecured loans because if you default on a secured loan, the lender can take possession of the collateral. Therefore, from a lender's perspective secured loans are less risky than unsecured loans. However, there are many elements that go into the underwriting of a loan, and if you have poor credit or very little income you may not find it easy to qualify for a loan even if you have good collateral.
Every bank establishes its own criteria on the types of collateral you can use to secure a loan. Most banks offer car loans but typically only finance cars that are less than seven years old. You can use a mobile home as collateral for a loan, but very few banks finance mobile homes constructed before 1977, due to the fact that older homes do not meet current building code requirements. Therefore, even you own property you can only use it to secure a loan if your property meets eligibility guidelines.
Loan to Value
When you secure a loan with collateral, the lender places a lien on it. However, in order to borrow against collateral you must have sufficient equity in the collateral to secure the loan. On home loans, banks typically only let you borrow between 80 and 95 percent of your home's value. Lenders appraise your property value and determine if you have enough equity to secure the loan. If you lack equity you can borrow a reduced amount or secure the loan against different collateral.
Debt to Income
When you apply for a loan, you must prove to the lender that you can afford to make the monthly loan payments. Generally, you must provide the lender with your most recent pay slips, or if your are self-employed, your tax returns. Lenders calculate the combined total of your existing monthly debt payments and the proposed loan payment as a percentage of your gross monthly income. Typically, you can only qualify for a loan if your debt-to-income ratio does not exceed 35 or 40 percent.
If you have acceptable collateral and a low debt-to-income ratio, you may still have problems qualifying for a loan if you have a low credit score. Credit scores range from 300 to 850, but in order to qualify for some loans you need to have a score in excess of 700. For home loans you can qualify with a score above 620. However, late payments and other derogatory events can stay on your credit report for up to seven years and can cause your score to fall significantly. Therefore, your past credit history may preclude you from qualifying for a loan.
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