RESPOND TO EACH DISCUSSION RESPONSE ACCORDINGLY (160 WORDS EACH)
KM1. The advantages are that (if it’s a significant amount) it can lower the interest rate. That will lower the overall cost of the financing. You can obtain financing that would otherwise not be available if you don’t have anything to offer. Finally, you’ll be able to obtain larger amounts of financial help because the bank will be able to trust you more. They don’t suffer a total loss if you are unable to repay the loan. However, that is one of the disadvantages. If for whatever reason you cannot repay the loan, you will lose whatever is used as collateral. Another negative is that whatever you use is tied up in the loan. For example, my parents used their home as collateral to purchase a convenience store. They considered selling their home. They realized how difficult it would be to sell the home because of the contract with the bank, so they decided against it completely. It was too much of a hassle.
SG2. Collateral loans, also known as secured loans, have advantages and disadvantages. Some advantages of taking out a collateral loan are that it is often easy and quickly approved, and the borrower can usually request more money than he or she could with an unsecured loan. When taking out such a loan, however, the property used as collateral is at risk if the borrower cannot fully pay back the loan in the amount of time given. Another con of collateral loans is that they are not available to just anyone. If the potential borrower does not own a house, vehicle, or other piece of property routinely used as collateral, he or she cannot take out a collateral loan. Due to the nature of collateral loans, there is little risk to the lender. If a borrower cannot or refuses to pay back the loaned amount, the lender essentially owns the borrower’s property. With this in mind, lenders are usually quick to approve loans, even if the borrower does not have a pristine credit history. More often than not, people that are turned down for unsecured loans can get a secured loan because there is so much less risk to the lender. While this is a definite advantage over unsecured loans, it is up to the borrower to determine if the risk of taking out collateral loans is worth taking.
IM3. The advantages of using collateral to secure long-term financing are the greater availability of loan programs that they borrower can qualify for, lower risk and more profitability, loan payment terms can be reasonable, and if the loan defaults, the creditor will just take possession of the collateral goods.
The disadvantages of using collateral to secure long-term financing are that the loan term could provide a higher interest rate such 15% to 20%. If the collateral has no value or not valued as much as the loan amount being borrowed, the creditor might not want to give a loan.
An example of a secure loan is title auto loans. When the car is paid off, typically there is no more auto loans. An individual needing quick cash would use their paid off vehicle as collateral to obtain a secured loan. The advantage of this situation is getting the quick cash immediately upon approval. The two disadvantages are when borrower defaults on the loan, the creditor can repossess the vehicle, in which the vehicle might be valued more than the loan that was borrowed on along with the interest rate can be outrageously high.
Reference: Lacoma, T. (2014). eHow . Retrieved from http://www.ehow.com/info_7751636_disadvantages
JK4. A disadvantage when using collateral to secure a long term loan is not having the ability to sell the item used as the collateral until the loan is paid back in full. An example of this situation would be wanting to sell one’s house to buy either a bigger house or one in a better location, but without a clear title this would be impossible. One should use an item for collateral that they plan to own longer than the term of the loan to avoid trying to sell a title that has lean holders on it. An advantage of using collateral to secure a loan is the lack of hassle and amount of credit score that is needed to be approved for a loan. In most cases the interest rate is lower or the borrowing amount is higher when compared to an unsecured loan with the same credit score. Also the credit score needed for a secure loan is lower than the requirements for a unsecured loan. This makes getting a loan much easier for people who have assets that retain their value over time.
EM5. An advantage of using collateral to secure any type of long-term financing is that it can reduce or lower the interest rate, depending on the amount being borrowed. Another advantage is that it can be easier and quicker to secure the loan. Banks like to offer loans if they can get a title back on the asset that is being used for collateral should the borrower fail to pay off the debt. Things with titles consist of real property such as buildings or cars, Inventory and Accounts Receivable, and cash savings or deposits.
Disadvantages to using collateral to obtain long-term financing is that it can be rather risky. The owner could lose their inventory that they need to product the products that customers are looking for. Some banks will refuse to accept collateral as a way to secure a loan because they only want to make these types of loans available to people who actually own property. Another disadvantage is that it could be expensive to come up with a solution to pay off the loan on time or there could be a lot of stress to find ways to keep the company going so that the business does not lose the collateral that the owners put up.
LD6. The collateral is usually enough to cover the loan you take from the bank. Most creditors will approve your loan application as long as you can provide some valued properties and assets as collateral. Suppose you own a small business and are researching with which bank to open your merchant account. Which benefit, service, or tool offered by banks is most important for you? Explain why.
Compare the Advantages and Disadvantages of Secured Loan. Retrieved from http://www.loans-advisor.com/2012/04/secured-loans-advantages-and-disadvantages.html
EM7. Long term bank loans provide funding for any business expenses and purchases a business must make. The borrower is then required to pay off the loan over a period of years instead of what is weeks or months in other cases. The advantages of a long term loan is that the repayment period is longer and you can borrow a larger amount. Another advantage is that the business has cash available when needed. A long tern bank loan also allows borrowers to have lower payments and interest charges also qualify for better interest rates. Disadvantages of long term bank loans is the rising interest on borrowed costs, and the interest rates and service fees.
LE8. Collateral assets come in many forms. Defined by the Small Business Administration, collateral is “an additional form of security which can be used to assure a lender that you have a second source of loan repayment.” Most commonly, collateral is real property, but it can also be represented by your business’s inventory, cash savings or deposits, and equipment.
In the past it was used the equity in homes, and some of that equity is no longer there.” Additionally, banks will not consider vacant land, or “dirt” as its referred to in banking, as viable collateral.
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