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Secured LOCs: What is the point?
Posted on 2/12/16 at 12:55 am
Posted on 2/12/16 at 12:55 am
Can someone explain the advantage to using a secured LOC, that is, a LOC that uses very liquid collateral such as a savings account in exchange for a very low interest rate.
I just don't see why I wouldn't simply use the funds already present to deal with whatever shortfall there is.
I just don't see why I wouldn't simply use the funds already present to deal with whatever shortfall there is.
2
Posted on 2/12/16 at 5:17 am to Volvagia
Some people don't want to liquidate everything they have, or at least whatever they use as collateral for the secured line.
This post was edited on 2/12/16 at 5:23 am
Posted on 2/12/16 at 7:51 am to RebelOP
I'm not talking about something secured by equities or even a CD.....I'm talking about a savings account where there isn't even a liquidation event, just a withdrawal to tap the assets.
Where is the value in paying the bank a fee to utilize that asset rather than simply withdrawing?
Where is the value in paying the bank a fee to utilize that asset rather than simply withdrawing?
Posted on 2/12/16 at 8:12 am to Volvagia
quote:
Volvagia
Sounds like you need to get that credit score up a little hoss... then the mean, old banker won't make you pledge everything you own
Posted on 2/12/16 at 8:43 am to Hoyt
Plus some people don't save well so when the get done paying it off they still have their collateral. I did it to buy a boat once. I knew I would not put back into my savings account so I paid a whopping 2% on my loan and got done and still had savings left over.
Posted on 2/12/16 at 8:45 am to MsState of mind
We use ours to fund rental property projects. Keeps us from having to pull any of our own money out of the bank. If you have a LOC at low rates, why wouldn't you use it?
Posted on 2/12/16 at 9:36 am to Hoyt
quote:
Sounds like you need to get that credit score up a little hoss... then the mean, old banker won't make you pledge everything you own
Actually I just purchased a house and have an unsecured LOC with my bank. But thanks for caring
I was just looking over my banks offerings and trying to figure out why would anyone want that.
If they already have the money, why take out a loan against it?
It is it just a credit building service?
Posted on 2/12/16 at 11:18 am to Volvagia
Need to read the above posts. There are a couple good examples.
Posted on 2/12/16 at 12:06 pm to RebelOP
Very low lending rates. Cheap access to capital. Easy way to pay off higher interest debt.
Posted on 2/12/16 at 12:53 pm to RebelOP
quote:
Need to read the above posts. There are a couple good examples.
80% of them don't seem to really apply. They seem to be referring to some kind of unsecured LOC or a HELOC.
You don't take out a 5000 dollar loan on 5000 dollars cash because of the "cheap money."
Basically what I got is that it is a credit builder/tool for those without discipline to force them not to deplete their savings but otherwise there isn't any value. It seems that is all it this.
Thanks.
Posted on 2/12/16 at 1:31 pm to Volvagia
Why not use other peoples money at a cheap to make more money? Our "secured" LOC is on equity on my parents house. It's paid off and we have access to a good amount of cash. I can buy a home with our LOC, fix it up and rent it and in 60 days roll it into a more fixed rate deal and release the LOC.
If we wanted to use our own funds, we would have to put down 20%, plus the cost of any repairs. Using the LOC, we literally don't have to come out of pocket on penny(minus $250 inspection fee before purchase). We could afford to pay for every house we have with cash too, but why tie up your own?
If we wanted to use our own funds, we would have to put down 20%, plus the cost of any repairs. Using the LOC, we literally don't have to come out of pocket on penny(minus $250 inspection fee before purchase). We could afford to pay for every house we have with cash too, but why tie up your own?
This post was edited on 2/12/16 at 1:35 pm
Posted on 2/12/16 at 4:02 pm to stevengtiger
You proved my point, most of the posts seemed to be answering the subject line as opposed to the OP.
I am NOT speaking of HELOCs which allow you to tap an otherwise illiquid asset cheaply.
Or even portfolio lines of credit where one could be betting that the growth of the assets could outstrip or downsize the cost of interest.
I'm talking having x money in the bank, and using that cash as collateral for a loan for a lesser amount of cash than the savings account balance.
In essence, paying a loan to use dollar bills you already have in the bank and could use with no sale or loan needed. It's already there.
I was just wondering if there was some other reason than credit building or forced discipline. It seems like there isn't.
I am NOT speaking of HELOCs which allow you to tap an otherwise illiquid asset cheaply.
Or even portfolio lines of credit where one could be betting that the growth of the assets could outstrip or downsize the cost of interest.
I'm talking having x money in the bank, and using that cash as collateral for a loan for a lesser amount of cash than the savings account balance.
In essence, paying a loan to use dollar bills you already have in the bank and could use with no sale or loan needed. It's already there.
I was just wondering if there was some other reason than credit building or forced discipline. It seems like there isn't.
Posted on 2/12/16 at 8:42 pm to Volvagia
Nope you're right....
On to the next subject.
On to the next subject.
This post was edited on 2/12/16 at 9:49 pm
Posted on 2/13/16 at 3:48 pm to Volvagia
It's really not that complicated. There may be a situation where you want to keep yourself liquid in case future unexpected situations occur that require the cash, but you also have access to a cheap interest rate loan.
Posted on 2/13/16 at 7:18 pm to jturn17
Don't try, we've tried. It's useless
Posted on 2/14/16 at 12:25 am to RebelOP
*sigh*
The products I'm talking about hold the cash for the remaining balance of the loan. It's not like you can cash out the savings account to handle an unexpected expense after taking out a loan against it.
How the hell does handing over 5000 in your savings account in order to get a 5000 dollar loan give you flexibility of liquidity? As you pay it back, you can potentially regain access to the principal.
It's the exact same as far as liquidity goes, except you are being charged for the service. You can't tap that principal, no matter how dire the emergency, without paying off the loan first.
The products I'm talking about hold the cash for the remaining balance of the loan. It's not like you can cash out the savings account to handle an unexpected expense after taking out a loan against it.
How the hell does handing over 5000 in your savings account in order to get a 5000 dollar loan give you flexibility of liquidity? As you pay it back, you can potentially regain access to the principal.
It's the exact same as far as liquidity goes, except you are being charged for the service. You can't tap that principal, no matter how dire the emergency, without paying off the loan first.
This post was edited on 2/14/16 at 12:46 am
Posted on 2/14/16 at 1:15 am to Volvagia
OP,
You are over thinking it. The use of a savings/cd secured loan has benefits. I get your line of thinking. It's tied up, I can't touch it, why not pay all cash? Is this for everyone? No. It feeds the need for a small set of people and here is why.
We can agree on building credit as a Pro for a savings/CD secured loan or loc, for someone with limited credit history.
Let's say I have 30k in a savings account and want a car for 30k. If i spend 30k on car, all cash is depleted and I have to self save again at $×××/ mo to build back to $30k.
However, I'll just get a car loan at 2%-5+%(lets assume credit isnt perfect) and keep my 30k in bank. Well here is a better option...
Place a CD secured hold on a 5 year CD paying 3% loaning you the money at 5%. Your net interest rate payback is only 2% vs 2% or higher on the scenario above. And after you payoff the loan, you still have $30k+ interest in bank and didn't have to force yourself to save it.
It certainly isn't for everyone and can work in rare cases to be a better scenario.
This is also subject to the math working out on current market interest rates. I had a CD that was actually paying more than my interest rate at one time. If you are going to do a loan anyway for something, the secured option can be better if the paying interest rate is high enough
You are over thinking it. The use of a savings/cd secured loan has benefits. I get your line of thinking. It's tied up, I can't touch it, why not pay all cash? Is this for everyone? No. It feeds the need for a small set of people and here is why.
We can agree on building credit as a Pro for a savings/CD secured loan or loc, for someone with limited credit history.
Let's say I have 30k in a savings account and want a car for 30k. If i spend 30k on car, all cash is depleted and I have to self save again at $×××/ mo to build back to $30k.
However, I'll just get a car loan at 2%-5+%(lets assume credit isnt perfect) and keep my 30k in bank. Well here is a better option...
Place a CD secured hold on a 5 year CD paying 3% loaning you the money at 5%. Your net interest rate payback is only 2% vs 2% or higher on the scenario above. And after you payoff the loan, you still have $30k+ interest in bank and didn't have to force yourself to save it.
It certainly isn't for everyone and can work in rare cases to be a better scenario.
This is also subject to the math working out on current market interest rates. I had a CD that was actually paying more than my interest rate at one time. If you are going to do a loan anyway for something, the secured option can be better if the paying interest rate is high enough
This post was edited on 2/14/16 at 1:19 am
Posted on 2/14/16 at 10:59 am to Volvagia
No one would ever opt for a secured LOC having access to an unsecured line
Posted on 2/14/16 at 11:03 am to RebelOP
quote:
Don't try, we've tried. It's useless
Posted on 2/14/16 at 12:42 pm to Volvagia
A lot of times it is better to borrow money in a company with multiple owners, even if one owner is the person pledging the collateral. Subordinated debt can get messy. Your basically paying a little interest to have a banker make sure the transaction is handled properly.
Also, it's a good way to build a relationship with a bank. Start with cash secured debt and then once they get comfortable with you, they will release the collateral.
Also, it's a good way to build a relationship with a bank. Start with cash secured debt and then once they get comfortable with you, they will release the collateral.
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