What Is Foreclosure and Is This For You?

We need money for a variety of factors and when we don’t have enough of it, we tend to opt for loans in order for us to be able to afford the property or business venture that we want to pursue. However, one cannot easily lend someone a huge amount of money freely and easily since the lender won’t have a guaranteeing factor that the debtor will be able to pay off their debt without a hitch. For the security of the creditor, a collateral property or asset needs to be offered if the circumstances don’t go as planned.

Related to this scenario is the importance of a foreclosure, but what is it and how can this be for you? Let’s find out.

First of all, when you are applying for a loan, lenders or banks will offer you better terms for a secured loan if you have a collateral property to offer. This means you have lower interest rates compared to when you settle for unsecured loans and it is a much safer investment for the lender. However, as a borrower, this does put you in the danger of a foreclosure.

What is foreclosure?

The foreclosure process basically gives the lender the right to use or obtain the property as a collateral should the debtor fail to comply with their payment obligations to the lender. The very moment that the debtor fails to pay their financial obligation to the lender, he or she is automatically considered as a delinquent and thus, the foreclosure process begins. In cases such as when a car is used as a collateral and the borrower has failed to pay the lender for the past few months, the lender then can begin to foreclose on the property and can use the vehicle in lieu of missed payments. The more that the borrower falls behind in their debt, the harder it will be for them to compensate for the delay in payments, especially since by that point, the debt could have doubled or tripled with all of the accrued fees.

What are the consequences?

Some properties end up in the foreclosure auction wherein the lender hopes to gain profit from the collateral property. However, if it fails to sell at the auction, the lender or the bank will take ownership of the property instead and it will inevitably be added to their portfolio of foreclosed properties. Fortunately, such properties can be attractive to certain real estate investors for they know they will be able to obtain it at a fraction of the market value price. However, this can be bad for the borrower because a foreclosure can remain on his or her credit report for seven years, further affecting future plans on loans.

How you will benefit or suffer from the situation will depend on who you are in this situation—the lender or the borrower—either way, the borrower will suffer more. The lender may obtain the collateral property, however, they are not a collateral business because they are in the money business—they prefer receiving cash instead of properties. That is why the next time you apply for a loan, you have to weigh out your alternative options and make sure that you can pay off your financial obligations to the lender in order for you to retrieve your collateral property.