Secured Personal Loans- Equity Decides the Loan Amount

By: Anaya Erika

Ever seen a watermelon fruit? Well, simply put, it huge. Now, compare it to its source... the watermelon seed. It seems impossible to imagine that a tiny seed would grow into such a such a massive fruit. This phenomenon of getting big, fruity results out of tiny sources works parallel to the concept of secured loans. By giving a low interest on the installment every month, one can actually fund major projects. So, be it buying a new house of your dreams or funding your child's education, going for a makeover surgery or exploring an exotic holiday destination, getting yourself the latest car model in the market or expanding your business, secured personal loans gratify your every financial need.

Your home equity can actually get you hefty loans at low interest rates, in fact the lowest in the market as other loans such as the unsecured loans carry almost double the APR of secured personal loans. Secured loans have a long repayment period that can stretch from 5 to 25 years and may even go up to 30 years, subject to lender's credit policy.

A secured loan is basically calculated on the value of the equity in the borrower's house. Equity if the market value of the house minus all debts running against the house. Greater the equity, greater the loan eligibility for the borrower. Although most borrowers grant loans up to 90% of the equity, some also offer up to 125% in case the borrower suffers from negative or insufficient equity. In the later case, the lender may charge a higher APR in comparison to the normal cases because the risk involved for the lender increases in the case of negative or insufficient equity.

It's a rule that in case of default, the first mortgage is always paid before other loans. So, if a borrower has, per say, two mortgages running on his equity amounting to 50,000 and 25,000 and his home value is 100,000, the equity left for the third mortgage i.e. the third secured loan is 25,000. However, if the lender grants him a loan valuing 50,000, he runs at a high risk. 50% of what the lender has granted is not secured by any equity and thus, he'll charge a comparatively high rate of interest than charged on the first and second secured loans.

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