How to Use Land as Collateral for a Secured Loan
Land can act as a powerful form of collateral if you need to acquire a secured loan. Depending on the size of loan you need, as well as your prior borrowing history, you might be required to use something as substantial as property to secure the funding you require. Fortunately, the act of listing your land as collateral can be accomplished without much hassle. Once the value of your land has been assessed by a qualified expert, you can begin the process of transforming your property holdings into qualified collateral.
Finding the Right Lender
Although land historically has been considered a qualified form of collateral, you might discover that particular lenders are more receptive to this idea than others. With that in mind, the first step toward using your land as collateral is to identify a series of compatible lenders, then assess and compare their loan terms and conditions. Remember that the first choice is not always the right choice when it comes to selecting your preferred lender. Always ensure that you find the best possible terms, which include important parameters such as interest rates and length of repayment, that match your needs.
Identifying the Value of Your Property
If you are intent on using your land as collateral, the next step is to determine precisely how much your land is worth. Given the wide variety of factors that can influence the value of your land holdings, it is quite possible that an appraisal will be required before you execute your loan. To do this, you will need to hire a professional appraiser who has been approved by the lender you have selected. Once the value of your land has been finalized, your lender will be able to provide you with loan terms that you can either accept or reject as you see fit.
After your appraisal is complete, your lender likely will check to see if your property carries any additional liens or debts. If so, this could directly affect the likelihood that your loan will be approved. Keep in mind that the condition of your land and its current level of development will influence the terms of lending that you are offered. For example, if your property is zoned residential and currently has a home on the premises, you could be offered a greater percentage of the land's value in a loan. If your land does not feature a property, you probably will be offered a lesser percentage of the value of the land.
Regardless of the particular details, it is important to remember that you have the option at any point in the process to exit these negotiations and seek out alternative lenders. Using your property as collateral represents a significant financial move that should only be entered into under the appropriate circumstances. Make sure you are comfortable with the terms of the loan before continuing further.
As a general note, remember that interest rates using land as collateral are often quite high. In some cases, interest rates may approach 15 percent. This interest rate is often comparable to forms of lending that require no collateral, such as credit cards. If another form of collateral is available to you, it might be worth your time to explore what those options. This is an important consideration, particularly in situations where you might be seeking to stretch your repayment out over a longer period of time.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.