How to Use Your Land as Collateral for a Secured Loan
Even for the most financially healthy people, loans can sometimes be difficult to obtain, especially larger ones. However, if you need a loan, options are available to help you get one, including using owned land or land that was gifted to you as collateral.
By using land as collateral for a loan, lenders are more likely to take on more risky customers, potentially at lower interest rates. However, you may lose your land if you cannot pay the loan back. Before giving up your land, it’s important to understand the advantages and disadvantages of collateral loans.
What are Collateral Loans?
Collateral loans are often called secured loans, as your own property guarantees the loan. The property can be anything from a car or house to an expensive ring or investment portfolio. Land that you own is commonly used as collateral. Mortgages are also considered collateral loans, with the house in question being the property.
If you do not pay on your collateral loan, the lender can seize the property to pay off the remainder of the loan. However, the guarantee makes lenders feel more confident in approving collateral loans. Collateral loans not only tend to have lower interest rates, but they can come in larger amounts compared to unsecured loans, which rely only on your credit history and income.
What Does it Mean to Use Land as Collateral for a Loan?
One way to secure a collateral loan is by using any land you own, including construction loans and even personal loans, if the lender approves you. To use the land as collateral, the land must have an equity value that is equal to or exceeds that of the loan amount. You must own it outright unless it is specifically a land loan.
Once a lender approves the land as collateral, a lien will be put on the land. The lien will be released as soon as the loan is paid in full. If the loan is not paid on time or defaults, the lender can seize the land, as set forth in the contract.
Understanding land value
To find the value of your land, the lender will typically require an appraisal from a real estate appraiser. The appraiser will assess the land value based on several factors, such as its condition, position, location, and environmental factors. For example, land further away from cities may be valued less than that near a populated area. If the land is near a city and the city has a restriction on it, such as an environmental protection act, its value would be impacted.
What Types of Loans Can Use Land as Collateral?
Depending on your needs and your lender, you can use land as collateral for a few different types of loans. The most common use of land collateral is for a land equity loan. Land can also be used as collateral for a personal loan, which can be used for almost anything.
Land equity loans
Land equity loans work similarly to home equity loans; they use the equity of the land you own to borrow against. The amount of equity the land has will be determined by several factors ranging from the size of the land, if there are natural resources on it, and even the history of the land and how it was used in the past.
To obtain a land equity loan, the land must be owned in full without debt. Land equity loans are available as a cash-out refinance, a land equity line of credit, and a construction loan.