All You Need to Know About Loans on Investment

In this world, debt is inevitable. If managed well, debt is that necessary evil you need to grow financially, especially if you plan on being an entrepreneur. Investments, however, are cash cows that can establish a financial stability. With money, it’s all about thinking ten years ahead. Borrowing to buy investments can be an effective way to boost your potential returns. This is called using leverage. As long as your investment increases at a rate that is higher than your borrowing costs, you can make money. But taking on debt involves more risk than paying for an investment outright with cash. So before you even think about taking out a loan, it’s important to know exactly how much you will need to borrow and if your investment can pay the loan for itself.

Most lenders, including banks, normally need some form of security so they can be assured that you are able to pay back the loan in full. This is commonly known as collateral. Collateral is mostly backed by the individual’s assets that the lender can claim should the individual default on the loan. Having collateral assets in the mix makes secured loans a safer bet for the lender which, in turn, can have a few benefits for you, the borrower. You can use:

Title Deed or Home Collateral

With a title deed already in place, you can use this as collateral for your loan. In the event that you do not have a title deed, you can take up a mortgage that can be set up as a loan secured by the property. This explains why banks can foreclose on a home owner who has defaulted on a mortgage. A second mortgage can be taken out on top of a first mortgage as a way to borrow against a home’s equity.

However, a title deed is the most important asset an individual can ever have. It’s an asset that appreciates and can be turned into an investment. Therefore, when offering your title deed as collateral, it’s important to do this wisely. And when arranging a payment plan for your loan, do it in such a way you will be able to afford it otherwise you risk losing a very valuable asset.

NOTE: There are many lenders disguised as predators for title deeds who take advantage of your desperation and use high-pressured sales tactics to get you to use your title deed as collateral. Make sure you read the fine print thoroughly and if possible, get a lawyer to review the terms and conditions of that loan. Legit people use legit ways of conducting business.

Vehicle Loans

Don’t have a title deed or a house? You can use your car as collateral for a secured loan or a car equity loan. Such loans are normally short term loans because vehicles are a depreciating asset. You can use these if you need quick cash that can be paid back in a short amount of time. Most of the time car equity loans are affordable due to the nature of the asset.

The downside of car loans though, is that when you combine the high fees and the short payment period, you may find that it is a very high-cost way of borrowing. So again, read the fine print carefully before signing.

Investment as Collateral

By using other investments or stocks that you have, you’re essentially ensured the loan from the lender. Investments are long term sources of cash, which the lender will be able to trust. You could even use the new investment as collateral for itself depending on how much income the investment will generate. The loan can end up paying for itself if it’s a proper investment

The problem is, especially with stocks, returns from these sources of income depend  highly on the fluctuating markets. For example, if the value of the stocks or investments depreciates, your lender could call the loan in and demand extra cash to make up the difference. Therefore, make sure you understand the terms and conditions of this kind of loan so you can protect your investments

Remember, borrowing with collateral loans will require extra diligence on your part to ensure the loan you take is affordable and manageable. Also, keep in mind that some kinds of loans are riskier than others so make sure you do your research thoroughly and repay your loans on time to avoid losing your assets