What is an equity loan? Does someone give loan against equity?

Any tangible asset (something you own that has value) can create equity if there is nothing owed against it (it’s not being used as collateral on a loan), or if the value of the asset exceeds the amount owed against it. Equity then represents a monetary amount that could be realized if the asset were liquidated (sold).

You can borrow against that equity. Many lenders will make you a loan using the equity as collateral by taking a security interest in the asset that creates the equity. This is called an equity loan.

Most often an equity loan is secured on a residential property, and most often that property is the borrower’s home or primary residence (as opposed to a rental or vacation property that the borrower owns). For the average homeowner, their home represents the most valuable asset they own and the most equity they have in a single asset.

For that reason when we hear the term “equity loan” many times we assume it means a loan on a home or a residential property.  But a lender can use equity from any asset a borrower owns to make a loan as long as the lender can perfect a security interest in that asset. Sometimes perfecting a security interest is as easy as having the borrower sign a document pledging the asset as collateral on the loan. Other times a Uniform Commercial Code (UCC) filing can perfect a lender’s lien on furniture, equipment, and other personal properties that represent equity to the borrower.

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