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Today I am going to discuss with you about Debt to Collateral Ratio. To get a best interest rate on a special loan you might have to deposit a collateral so the lender can recover some of his loan amount if you get defaulted. Whether you are borrowing money to pay for a house or car or to expand your business, understanding how lenders evaluate loan applications will increase your odds of securing the funds.
Collateral – A collateral is nothing but an asset. Normally the borrower deposits a part or his assets to the lender. The lender will keep this asset and will legally occupy it in case of default. The most common example of a collateral is a home bought with a mortgage. You will be the owner of the home, but the lender can seize it and resell the property if you fail to pay your monthly installment. You can not sell the collateral without lender’s permission. You as a borrower must look after the collateral because it will ensure the chances of winning a great deal and lender’s security. If your mortgaged collateral is a car or house, insurance is a must thing on it.
Down Payment – Lenders always prefer lower loan amount compared to a collateral. It would be easier for you to get approved by the lender, if your collateral is worth greater. Not only the approval, if your DTI is lower, you have to pay much lower interest out of your pocket. For an example – you have to put a downpayment of $6000 to borrow $14,000 for purchasing a car of $20,000. But if you have a high value collateral, you might have to pay only $2000. Therefore, borrowing a loan against a collateral is always a wise decision. It gives a balance between mortgage qualifications and interest.
Debt to Collateral Ratio – DTC or debt-to-collateral ratio is the most important factor which lenders consider. If you wish to take a bank loan for buying a home worth $100,000, very small number of banks will come forth to help you. So, The home will be the collateral in this scenario, and the bank or lender can seize it in case of default.
Importance of Debt to Collateral Ratio
The debt to collateral ratio seems very critical from the lender’s point of view. It will fix the chances of recovering the loan if the borrower fails to pay back. If the DTC is high, the loan amount will be nearly equal or less than the collateral. But if your DTC is low, you can get a loan approved which may be higher than your collateral value.