Loans after bankruptcy are not easy to get. Credit requirements on most loans will imply an immediate decline if a bankruptcy shows on your recent credit history. However, there are ways to overcome this problem. Collateral contributes to getting approved because it reduces the risk involved on the transaction and provides the lender with a guarantee of repayment.
Thus, it is a lot easier to obtain a secured loan after bankruptcy than an
unsecured loan. Actually, only low amount unsecured loans can be obtained after a bankruptcy process for many years. High amount unsecured loans are out of reach for those who have gone through bankruptcy unless at least 5 years have passed since bankruptcy was dismissed.
The Implications Of Collateral
Collateral acts as a guarantee of repayment of the loan borrowed. The amount of money lent is equal or lower than the value of the property used as collateral and thus, in the event of default, the lender is legally entitled to request the sell of the property in order to collect his money. This procedure is fast and has little hassles, thus, providing the lender with an important assurance of his investment.
This implies that the risk that lending to someone who has gone through a bankruptcy process is greatly reduced once the borrower offers a property as collateral. Also, it is possible for someone else (relative, friend) to offer one of his possessions as collateral if you are not a homeowner. Nevertheless, the risks that this implies need to be considered as the property can get lost to the lender if both the borrower and the collateral’s proprietor fail to repay the loan.
Loan Types Available
Financing after bankruptcy can be associated to different loan types. However, the main loans that can provide funds after bankruptcy are those associated with real estate forms of collateral. Home loans, home equity loans and refinance home loans are the loans that can provide funding after bankruptcy with the best terms and the higher approval rate.
Home loans or mortgage loans use a property free of debt to secure a loan. It is rare for someone who has gone through a bankruptcy to posses an asset free from debts and liabilities. But this sometimes happens when someone inherits after a bankruptcy or when the property is donated. In any case, the other forms of financing are more common.
Home equity loans use the remaining value of the property that is affected with a mortgage loan to secure an additional loan with similarly advantageous loan terms as mortgage loans. Equity is the difference between the property’s market value and the amount of debt that the property already secures. Thus, the amount of money you can obtain is limited to that difference of value.
Finally, it is possible to refinance a home loan and obtain extra funds by taking advantage of the available equity on the property. These loans are known as cash-out refinance home loans and can provide a fair amount of money, just like home equity loans with the difference that you will end up with a single monthly payment instead of two.
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