Types of Secured Loans
In commercial finance, a loan essentially is the borrowing of financial money by one or more persons, institutions, businesses, or other entities to others, companies, etc. The borrower is then obligated to pay interest on this debt and eventually to repay the principal sum borrowed and also to clear the debt before it expires. Commercial finance involves the loans taken by enterprises to buy raw materials, tools and equipment that are required for their production process; for the operations associated with the execution of business operations; for the acquisition of plant and property; for the construction of buildings and other structures. Different forms of commercial finance include merchant financing, commercial real estate financing, infrastructure financing, leveraged financing and private placements. There are many different types of commercial real estate financing including development capital, venture capital, owner financed development, and first lien commercial mortgage.
Commercial banks are the major financial institutions in the US that provide loans for a range of purposes. Most such banks have tie-ups with other financial institutions like credit unions, mortgage banking, pension funds and insurance companies. Most such banks are classified into two types namely commercial banks and savings and traditional banks. In the case of a traditional bank, the main function of such institution is to lend loans. On the other hand, commercial banks use their depositors and other external sources to finance the loans advanced to the borrowers.
Commercial mortgage loans are advances obtained through commercial mortgage insurance policy or an equity mortgage from the lenders to finance the purchase of residential property or any other asset such as automobile or boat. The property or asset that is bought is used as collateral to secure the loan. The value of the asset to be secured can vary from several hundred dollars to several million dollars. An advantage of undertaking a home loan or a commercial mortgage is that the borrower will be in a position to make the monthly payments even during economic recession.
The federal tax law has placed certain restrictions on the homebuyers and borrowers regarding the amount of loans taken. Generally, it has been the rule that the maximum amount of loans to be taken by any individual during one year is $1000. Another restriction of this tax law is that the loan must be taken on the basis of the borrower’s income and not on the basis of his own assets. In case the borrower fails to repay the loan amount, the government would be liable to return the money to his shareholders. Thus, this type of loans are termed as secured loans.
Gold loan or precious metals loans are advances obtained by the borrowers against the value of their gold bullion. Such loans are sanctioned only if the borrower has sufficient earnings and is willing to place collateral. In order to qualify for a gold loan, the borrower must be able to convince the lender that his investment is safe despite the prevailing circumstances.
Home mortgage loans are technically second mortgages. Unlike a first mortgage loan, which depends solely on the equity value in the borrower’s property, a second mortgage loan relies on the value of the collateral. If the borrower fails to make the monthly payments, the lender may repossess the collateral. This can only happen if the borrower does not have the financial means to meet the repayment. In this case, the lender would be forced to agree on a lower interest rate and extend the tenure of the loan as long as feasible in order to recover at least some of the money originally lent.