Disadvantages of a Tenant Loan

A tenant loan is a term used for loans extended to persons who do not own property. This type of loan may also be called a personal loan or an unsecured loan. Instead of using property or home equity as collateral, the borrower will not place collateral in order to receive the loan. While this may be an attractive option for a person who does not have home equity to tap into when in need of fast cash, there are several disadvantages to this type of unsecured personal loan.

High Interest Rate

The major disadvantage of a high risk loan like a tenant loan is the interest rate. When a loan is secured against an asset, like a home mortgage, the loan is typically less expensive. The lender is assuming far less risk. Whenever a lender assumes less risk, they charge less. This means a tenant loan rate will be higher than comparable mortgage rates or home equity line of credit rates. Ultimately, the expense of the loan must be weighed against its potential benefits

Bad Loan Terms

High risk loans also come with bad terms. This means a borrower may face a higher penalty in the case of loan modification or delinquency. Loan terms are often overlooked, especially by first-time borrowers. Since you are taking out the loan before you own property, you have a good chance at receiving a better loan option if you wait until after you have assets to place as collateral. In this case, you would want to refinance or modify your debt in the future. Lenders understand tenant loans carry a high risk of this type of modification. They build in protections against this that attempt to lock you into your initial loan quote and contract.

Harder to Secure

Without collateral, loans are much harder to secure. You will have to show proof of income in order to secure the loan. Your application will also be judged more closely on other criteria such as your credit history and character references. If you have any reason to suspect you are not a good candidate for a loan, then you should attempt to use collateral instead of opting for an unsecured loan in order to receive faster approval. Be prepared to meet speculation when you are not securing the loan and do not own any property to fall back on.

Prevent Future Loans

Most people will seek a mortgage loan in their lifetime. Often, people intend to seek these loans shortly after getting a tenant loan. If you pay off your tenant loan before seeking a mortgage, the action can be financially beneficial. If your loan is still outstanding when you seek a mortgage, however, you will find it much more difficult to secure appropriate financing to buy property. Most Americans will amass wealth only once they own property. This means going too far into debt before owning property can be financially detrimental. Mange the limits on any tenant loan to assure your financial status has you prepared to own property at some point in the future.

 


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