Currently, financial independence at an early stage is totally aligned with an individual’s passive income source. Anyone who wants to reach the heights of financial success is creating a source of passive income. Among various sources of passive income, secured lending is a very common practice. If you want to learn aa well as earn with secured lending then you have come to the right place. In this article, I am going to tell you about secured lending and how to earn money via secured lending.
What is secured lending?
Secured lending is the practice of giving a loan to a borrower that is backed by collateral. Here the collateral acts as insurance against defaulting on the loan. Thus, reduces the risk of the lender. Collaterals generally have a higher value than the loan.
On the other hand, unsecured lending is not backed by any collateral which increases the risk of the lender.
Why it is a better option than unsecured lending?
Secured lending has several benefits over unsecured lending. Let us see some of them here.
- Secured lending has collateral on which the lender has a lien. It acts as a security when lending out money. If in case, the borrower fails to repay and default, then the lender can seize away that collateral. They can use it to sell and get back the outstanding portion of the loan.
- Secured lending generally comes with a low rate of interest, unlike unsecured loans. Since there is a greater risk in unsecured loans and no guarantee, borrowers are often required to pay a high-interest rate.
- Secured loans give the borrower a longer time period while in the unsecured loan the borrower gets a shorter period of time which increases the pressure and risk.
- A high amount can be borrowed as the lender has the confidence of getting the money back or else can sell the collateral to get the same.
- Secured loans like mortgage and home equity loans, allow individuals to take tax deductions for the interest paid on the loan each year.
- Secured loans also help in strengthening the credit score. As a borrower, you can build your credit history faster by making timely payments. A good credit score lends credibility and makes you eligible for credits for future loans.
Secured lending as a passive income
Passive income is a source of earning money without actively taking part in it. Being said that, it does require a lot of effort and investment upfront to get started. In the initial few days, you have to spend time in planning and strategy building, executing as well as keeping a backup.
Lending money as a source of passive income is an age-old practice. Previously we have heard stories of leaders and borrowers where the lenders sanction a loan at a very high-interest rate to a borrower. Most of the time the borrower fails to repay the loan and the lender takes aways the valuable assets or uses unfair means of practice to get his money. Gone are those days. Now, with the increase in legal actions and policies if an unsecured loan gets defaulted by a borrower, then the lender won’t be left to capture any collateral. In such a case, they will have to write off the loan as a loss.
Keeping in mind such a difficult scenario, I would personally suggest always choose secured lending. The return may not be as high as unsecured lending but there is a guarantee of repayment along with interest. For most of the individual getting thinking of creating extra income, I don’t think you want to spend sleepless nights in fear and anxiety of losing your money. Or, knock on the doors of court in order to get your money back or get into a credit collection agency. All these will result in losing your investing money.
Types of secured lending
- Home Equity: Home equity loans and HELOCs are used as equity against your home. The difference between the property value and your mortgage balance is used as collateral. It is generally used as a second mortgage.
- Mortgage: With a mortgage loan, you can put up your property or home as collateral to buy that home. In case you fail to repay, your home will be leased.
- Automobile loans: Whether you want to buy a car or any other automobile, your vehicle can be used as collateral. In case, you fail to complete your payment on time your vehicle can be seized.
- Business loans: Business loans can also be secured loans. For example, if own a construction business or want to open a new store like a retail shop, gym, restaurant, etc. you can take a loan with the equipment of your business as collateral.
- Life insurance loan: This loan lets you borrow money against your life insurance using its cash value as collateral. You need to repay or it will be deducted from your death benefit given to your beneficiaries after your death.
Things to remember before you lend your money
Before you start lending out your money, there are multiple things you need to check before doing the same:
- Legal work: Not to mention, before lending your money to a borrower do proper paperwork. Even though there might be collateral to support their credibility, without a legally authorised paper you could get into trouble.
- Background check: It is good to know about the past experience of your client before lending out your money. Lenders can be easily fooled by sweet-talkers. If they have a bad history of the previous loan, it is better to avoid such clients. Even after having collateral, it is better to avoid situations of leasing assets.
- Time period: The secured lending borrower is given the privilege of having a good amount of time period. You need to keep in mind that you have to wait for quite sometime before getting your return. If you have any debt or mortgage money to pay, you have to manage that.
- Interest rate: Since there is a security of collateral, the rate of interest is also low. In order to get an expected return, you need to invest in that way.