Asset based lending relies on the use of collateral to secure the loan. Asset based lending can be described as different to a normal loan due to it being a loan with no credit check. Borrowers will provide their creditors – be it a bank or another lending institution – an asset that will be sold or liquidated in the event that the borrower fails to repay the loan as agreed. Business assets, personal assets, vehicles, and real estate can be used as collateral when applying for asset based lending.
When using real estate or properties as collateral for a loan, there are a few things to keep in mind. These types of assets can include houses, condominiums, commercial properties, cottages, or possibly even lots. The specific kind of property will affect the actual amount of the loan that can be extended to the borrower. Of course, a residential type property will be of less value compared to a commercial one. The kind of real estate will also determine how quickly or how easily the asset can be sold in the future, if required. The greater the value and the ease of sale will help determine the possibility of having a loan.
Ownership of the property is also an issue. If the borrower does not own the asset, he or she cannot use said property as collateral. This is because, in the event of a default, the creditor now owns the title to the property, and thus has the right to sell the property to cover any losses caused by the default.
Another area of concern when looking into asset based lending is the borrower’s financial history and health, which includes income, savings, other debt, and past repayments made. If the bank or the lender does not consider the borrower able to repay them, it is very unlikely that the loan application will be approved, or at the very most, the loan will be given but at low amount and a high interest rate.
When loaning against a residential property in which the borrower currently resides, banks and lending institutions might have special regulations on whether or not the borrower is allowed to lease or rent the property for the length of payment period. It is important to take this into consideration when applying for the loan, as well as other particular policies that may be lender specific.
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