Loan collateral is an action aimed at guaranteeing the lender (bank) the possibility of effective debt collection from the borrower, which is served by various types of collateral. The mortgage is secured by establishing a mortgage on the property.
A consolidation loan or a cash loan may have other collateral, for example, a bank pledge on movable items, the purchase of which is financed by such a loan.
What is the loan collateral?
Bank loan collateral is a tool that guarantees the lender (e.g. bank) the return of receivables from granted loans. At the same time, loan collateral allows the reduction of individual credit risk, i.e. the risk that results from a failure to repay a single liability.
There are various types of loan repayment collateral acceptable to the bank when granting financial obligations.
For what purposes do banks require collateral for a loan?
If for various reasons, the borrower is unable to pay the loan obligation himself, based on his own creditworthiness, the loan collateral will be activated and the bank will be able to assert its rights through it.
In order to reduce their credit risk, banks apply appropriate measures to secure loan repayability. One of them is to require the borrower to submit legal collateral for the loan.
The overriding goal related to establishing a loan repayment guarantee is to provide the bank with a refund of amounts due under granted loans and bank guarantees, irrespective of the circumstances if the debtor does not settle his liabilities within the agreed time.
This is to ensure the bank’s effectiveness in pursuing claims and to increase the value of assets from which the bank can satisfy.
Does the loan collateral affect its cost?
By using appropriate loan repayment security, it is possible to reduce the borrower’s costs.
The total cost of the loan will be lower due to the fact that the bank bears less credit risk in connection with such commitment to the customer.
What are the legal types of loan collateral?
Legal collateral for a loan is a series of collateral for loan repayment. They are divided into personal and material security.
Material security limits the liability of the person providing security to individual components of his property, and personal security is characterized by the personal liability of the person providing the security, which means that he is responsible for the debt with all his property.
What factors influence the choice of loan collateral?
When determining the loan repayment collateral, banks take into account many different criteria, including:
- type of loan,
- loan liability amount,
- loan period,
- the real possibility of satisfying the bank’s claims from the accepted collateral in the shortest possible time,
- the borrower’s economic and financial standing,
- credit risk is borne by the bank,
- features specific to the type of security,
- borrower’s legal status,
- the expected workload of bank employees,
- security costs for the bank and the customer.
Legal collateral for a loan cannot be treated as a substitute for the customer’s creditworthiness.
Personal loan collateral – how does it work?
The essence of personal loan repayment collateral is that the borrower and the persons providing the loan repayment guarantee are responsible for the resulting debt with all their assets.
In the absence of repayment, the creditor may apply for capital that was accumulated by the borrower and guarantors both before and after the loan was granted. Personal loan collateral can take many different forms and affect not only the borrower but also third parties.
What forms of personal protection are there?
The group of forms of personal collateral for bank loan repayment includes such collateral as:
- promissory note bail – obliges the guarantor on a par with the issuer of the promissory note to repay the loan on due dates;
- surety under civil law – the guarantor undertakes to repay the loan if the borrower defaults;
- bank guarantee – an obligation on the bank to pay the sum of money to the lender corresponding to the amount of outstanding loan installments, together with interest and costs due, unless the borrower defaults on his obligations to the creditor;
- debt assumption – a third party takes over the debt and becomes the borrower;
- assignment of receivables – an agreement between the borrower and the bank granting the loan, under which the borrower transfers to the bank his rights to receive a specific sum for goods or services sold;
- joining the debt – a third party joins the existing borrower who acts as a joint and several debtors;
- promissory note – a document that can have a blank form and then only contains the signature of the promissory note issuer, without specifying the bill amount and the due date.