Similar to home equity, land equity is the value of your land minus any money you owe on the loan used to purchase it. With a land equity loan, you can turn that equity into cash without having to sell the land itself. You can use it to build a home on the property, pay down high-interest debt or cover unexpected medical bills.
Getting a personal loan can be difficult especially if you have less-than-perfect credit. But did you know you may be able to use land you own as collateral to secure a personal loan? Using land as collateral for a personal loan can make it easier to qualify and get better loan terms. However, it also comes with risks that you need to understand.
In this complete guide, we’ll explain everything you need to know about using land as collateral for a personal loan We’ll cover
- What collateral is and how it works
- Benefits of a secured personal loan
- How to use land as collateral
- What land can be used as collateral
- Risks of using land collateral for a loan
- Alternatives to use if you don’t have land
What Is Collateral and How Does It Work?
Collateral is an asset you pledge to the lender that they can seize if you default on repaying the loan. The collateral guarantees the loan, which reduces the lender’s risk. That’s why secured loans that use collateral often have lower interest rates and allow you to borrow more money compared to unsecured personal loans.
With a secured personal loan, if you stop making payments, the lender takes possession of the collateral. They will sell it to recoup the unpaid loan balance. For example, if you use your car as collateral for a $10,000 personal loan and default with $5,000 still owed, the lender can repossess your car and sell it to collect that $5,000.
Land and real estate are commonly used as collateral for secured loans. The land acts as a guarantee to the lender that they can recoup their money if you don’t repay.
Benefits of Using Land as Collateral for a Personal Loan
There are several potential benefits to securing a personal loan with land:
Easier to qualify – Since your land guarantees repayment, lenders are more willing to approve borrowers with lower credit scores who might not qualify for an unsecured personal loan. Using land as collateral improves your chances of loan approval.
Borrow more money – Most unsecured personal loans max out at $40,000 for good credit borrowers, or even less if your credit is fair or poor. But with land as collateral, you may be able to borrow up to 80-90% of the land’s appraised value. If your land is worth $100,000, you could potentially get approved for an $80,000 – $90,000 secured personal loan.
Lower interest rates – Interest rates on secured loans are often significantly lower than unsecured loan rates. With land as collateral, expect interest rates 2-5% lower than an unsecured personal loan. This can save you hundreds to thousands in interest costs.
Flexible usage – Once approved, how you use the loan proceeds is flexible. Secured personal loans allow you to use the money for almost any purpose – debt consolidation, home improvements, medical bills, starting a business, etc.
Build credit – Making on-time payments on a secured personal loan can help rebuild or establish credit history. This makes it easier to get approved for credit in the future.
How Does Using Land as Collateral for a Loan Work?
If you want to use land as collateral for a personal loan, there’s a process the lender will follow to secure their interest:
You prove land ownership – Provide the deed showing you own the land free and clear without any existing liens against the property.
The lender appraises the land – They will hire an appraiser to assess your land’s current market value. This determines the loan amount you qualify for.
Lender places a lien on the land – They file a lien with your county recording office. This gives them a legal claim on your land if you default on the loan.
Make loan payments – You make monthly principal and interest payments as required by the loan agreement. As you make payments, the loan balance goes down.
Lien release after payoff – Once the loan is fully paid off, the lender releases their lien claim on your land. Ownership transfers fully back to you.
This process secures the lender’s investment while allowing you access to the land’s equity through a low-rate personal loan. Now let’s look at what type of land can be used.
What Land Can Be Used as Collateral for a Personal Loan?
You need to own the land 100% free and clear to use it for collateral. Here are some common situations where land equity can be tapped:
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Raw rural land – Undeveloped acres in the country can potentially be used if appraised high enough. But raw land is considered riskier by lenders than improved land.
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Residential land – Empty lots in developments, urban in-fill lots, and acreages with livable structures are ideal real estate collateral. Improved land is best.
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Agricultural land – Farm and ranch land with productive fields or facilities can make good collateral if it appraises well. Fully owned farms are preferred.
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Commercial land – Vacant commercial property or land with business structures in busy commercial areas make for excellent collateral with healthy valuations.
The key qualifications lenders look for are high appraised value, viable location, and no existing finance liens against the property. Talk to lenders to see if your specific land meets their collateral requirements.
Know the Risks of Using Land as Collateral
While secured loans offer many benefits, you also take on risk when using your land as collateral:
Your land is on the line – Defaulting on the loan means the lender can seize your land and sell it to recover their money. You must be 100% certain you can make the monthly payments to avoid foreclosure.
Land value can drop – If the market value decreases after you take out the loan, your debt could exceed the collateral value. This makes it riskier for you.
Short-term loans – Most secured personal loans are 1-7 years. You may need to refinance into a longer loan when it matures if you still need financing.
Closing costs – Expect to pay appraisal, recording, and title fees as part of the lending process, adding to your total costs.
Tax implications – If your land is foreclosed on, the remainder of the unpaid loan balance becomes taxable income. Consult a tax expert for guidance.
Credit impacts – Defaulting will also severely hurt your credit standing for years. A secured loan is absolutely vital to repay on time.
Alternatives If You Don’t Have Land for Collateral
Some other options to consider if you need funds but don’t own real estate:
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Borrow against investments – Some lenders accept investment accounts as collateral for personal loans. This includes 401(k)s, mutual funds, annuities, and brokerage accounts. You don’t liquidate the assets – they are managed by the lender if you default.
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Use a Passbook savings account – A share-secured loan from a credit union lets you borrow against funds in your savings account. The funds serve as collateral that the credit union can collect if you don’t repay.
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Cash-value life insurance loan – Borrowing against the cash value built up in a whole life, universal life, or variable life insurance policy is a potential option. The death benefit guarantees the loan.
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Auto title loan – These high-rate loans use your paid-off car as collateral. Vehicle mileage and condition requirements vary widely amongst title lenders.
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Pawn shop – You get a loan by pledging an item of value as collateral that the pawnbroker holds during the loan term. Jewelry, electronics, musical instruments, and firearms are commonly used.
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Peer-to-peer lending – Online P2P platforms like Prosper, LendingClub, and Upstart match you with individual investors. Loans are unsecured, based on creditworthiness.
While not quite as advantageous as a land-secured loan, these options provide alternatives if you need to tap equity you have in other assets.
Get Started Using Land as Collateral for a Personal Loan
If you have land available to use as collateral, take advantage of the benefits a secured personal loan offers. Be sure to choose an established lender like Southeast Bank that has experience with land-secured lending. Their secured personal loan product offers flexible terms tailored to your situation.
To find out more about qualifying requirements, loan amounts, rates, and the application process, talk to one of Southeast Bank’s knowledgeable loan officers. They can guide you through every step of successfully tapping your land equity with a secured personal loan that fits your needs.
How does a land equity loan work?
With a land equity loan, you’re cashing out some of your equity by putting up your land as collateral. If you default on the loan, you could lose the land to foreclosure.
Land loans are risky for lenders — especially if you’re still paying off the land — so the requirements are typically more stringent than they are for home equity loans. Lenders typically want to see lower loan-to-value (LTV) ratios and often offer shorter repayment terms. They also tend to charge higher interest rates.
If you still have an outstanding balance on the loan you used to buy the land, the land equity loan will be a second mortgage. That means that if the land goes into foreclosure, your original loan would be paid off first, and the land equity loan will be repaid with whatever’s leftover from the sale of the property.
What defines a land equity loan?
Land equity loans are similar to home equity loans, except your land is used as collateral instead of your house. The land may be raw without any improvements, or it may have some infrastructure in place, like electric and water lines. A person taking out a land equity loan may own the land outright or have a land loan, which is like a mortgage for a piece of land.
Collateral Loan Tips
FAQ
Can I use my land as collateral for a personal loan?
Can I borrow against land I own?
What kind of collateral do I need for a personal loan?
Can you use a deed as collateral for a loan?
Can land be used as collateral?
Land can be bought using land loans or personal loans . You can get different types of loans using land as collateral, though it can be challenging. Some lenders don’t accept land as collateral. Others may require the land to be worth a certain amount. Always check with a lender to see if they accept land as collateral before applying.
What types of loans use collateral?
Common loans that use collateral include mortgage loans, car loans, land loans, title loans, home equity loans, and land equity loans. Sometimes personal loans can also be collateral loans, depending on the borrower’s finances and the lender’s policies. Several of these can rely on either property or land as collateral.
How do I secure a collateral loan?
One way to secure a collateral loan is by using any land you own, including construction loans and even personal loans, if the lender approves you. To use the land as collateral, the land must have an equity value that is equal to or exceeds that of the loan amount. You must own it outright unless it is specifically a land loan.
Can land equity be used as collateral for a loan?
You may find it harder to use your land equity as collateral for a loan if you still owe money on a land loan. If you’re struggling to find a land equity loan lender that’ll serve you, look at local banks or credit unions that operate in the area where the land is located. See current home equity loan rates today.