How to exit your caveat loan
Caveat loans have become an increasingly popular option for many Australian business owners who need quick access to finance. This loan type allows you to use your residential property as collateral without having to go through the time-consuming process of applying for a more traditional loan.
While they are certainly a convenient alternative, borrowers should have a solid plan for repayment before taking out a caveat loan. Here, we look at some of the caveat loan exit strategies we suggest to our clients that you might want to consider.
What is a caveat loan and exit strategy?
A caveat loan is a type of short-term loan that is secured against the borrower’s property. Most commonly used by individuals and business owners who need fast access to finance, they are neither time- nor resource-intensive like the traditional loan application process.
The method for paying back this loan in full is called an exit strategy. Having a strong exit strategy will reduce your own risk, so to help put you in the best possible position for a caveat loan exit, here are some commonly used strategies.
- Refinance with a traditional loan
Refinancing allows you to pay off your caveat loan and replace it with a more traditional loan that may have a lower interest rate and longer repayment terms. While this is the preferred exit strategy for borrowers who have a strong credit rating and sufficient equity, those who have previously struggled with qualifying for a traditional loan may need a little more proactive support from their broker in cementing this as a viable option.
- Sell the property
Another option is to sell the property the loan is secured against. This exit strategy may be preferable if you are unable to secure traditional financing or are struggling to meet the existing terms of the loan. By selling the property, you may be able to pay off the caveat loan and other outstanding debts, while also avoiding the negative consequences of defaulting on the loan.
- Seek an extension
If you are unable to repay your caveat loan within the agreed-upon period (usually six to 12 months), you may be able to seek an extension from your lender. While not all lenders will grant extensions, some may be willing to work with you if you are experiencing financial difficulties. Be aware, however, that any extension will usually come with additional fees and interest charges.
- Look for a short sale
A short sale is another option for borrowers who may be struggling to repay their caveat loan. A ‘short sale’ simply means that the property used for collateral is sold for less than the outstanding debt, and the lender agrees to accept the sale amount as payment in full. While a short sale can help you avoid foreclosure or repossession of the property, it can also have a negative impact on your credit score.
- Seek debt settlement
While not an ideal outcome, if you are unable to repay your caveat loan and are facing repossession of the property, you may be able to negotiate a debt settlement with your lender. A debt settlement involves the borrower and lender agreeing to a reduced payment, which is typically less than the full amount owed. Just like seeking a short sale, debt settlement may negatively affect your credit score as well as your overall financial situation.
“Caveat loans can be a useful tool for those who need quick access to finance, but borrowers should be aware of the potential risks and have a solid plan for repayment before taking out a caveat loan,” says Gary Rawlings, Managing Director at Ezi Private Lending. “If you are considering a caveat loan, it’s important to speak to an expert who can help you understand your obligations and chart the best course of action for your unique financial situation.”
Does a caveat loan sound like the ideal solution for your specific needs? Our team of expert brokers can help you find the right private lender, so contact Ezi Private Lending online or call 1300 854 033 to get started.