When To Use Collateral

Thought for today:

Secured debt is debt that’s backed by collateral, such as a house, car, or other asset.  When a person borrows against collateral, they guarantee that they will turn over this property to the lender if they default on payments.

Members share:

“I once took out a home equity loan to build an accessory apartment that I was going to rent out.  The problem was that I never calculated my ‘break even point’ – the point where the loan would begin to pay for itself, and I would be cash-positive.  There’s no point in using secured debt if you won’t have positive cash flow for so long that you can’t sustain the monthly payments.  Ever since then, I think through any investment loan.”

“One time I needed to buy tires for my car but I didn’t have the money.  I did own a guitar and sound equipment that together were worth the cost of the tires, so I asked my parents for a loan and to hold my music equipment until I could repay them.  They didn’t want to hold the guitar, but I made it clear it was necessary for my sanity, and that the equipment was theres if I couldn’t repay them. I felt more confident knowing I had something I had to offer.”

“Putting up collateral makes me more mindful of the cost of money because I risk losing an asset if I don’t keep up the repayment schedule.  It doesn’t mess with my brain like unsecured loans did.”

More about collateral:

Collateral agreements should be in writing.  Examples include turning over a prized antique for a temporary loan to pay for a car repair – or, more formally, a mortgage agreement.

It’s not wise to commit to a collateral loan lightly.  We are willing to turn over the asset if we can’t pay on time.

Ask:

If I am considering a  loan secured by collateral, am I clear on the repayment plan?  

Meditation for today:

Integrity leads to peace of mind.  Therefore, align your actions with your beliefs.

Affirmation for today:

“I will take my time and not feel pressured when I make important money decisions.”

“I communicate clearly about all my agreements.”

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