Banks live largely from lending money. That’s why they can’t use one thing at all: bad loans in their books. To avoid failures, several mechanisms work. From the applicant’s credit check to the securing of the loan or loan. Depending on the type of loan, banks have several options to choose from.
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In the case of a loan without a prescribed purpose, in contrast to, for example, a car loan, no special collateral has to be deposited. Regular income is sufficient as security here. Therefore, it is checked very carefully in advance whether the salary covers the current obligations and the burden of the credit.
Additional security deposits are only necessary in exceptional cases and with some special forms of instant credit. We explain what loan collateral is available here.
Why are loans secured?
From the customer’s point of view, the loan collateral agreement is a popular necessity that cannot be avoided with certain loan applications. If you have an insufficient credit rating or demand a certain amount of loan, you have to provide security – or you don’t get a loan.
Since many borrowers are not able to repay their debts as reliably as they might have expected, banks need collateral to be able to lend money. In many countries, banks are not yet legally obliged to take out loan collateral. Conversely, hedging for the bank always means hedging its customers. If there is an emergency, the lender can or must sell the security.
The granting of loans, and thus also the ordering of collateral, is regulated by a good number of legal texts. The sum of all guidelines makes the work of the credit institution extremely difficult. Therefore, major banks merged to work on a data platform for corporate banking. This should make it possible for corporate customers in the future to no longer report all relevant data from each bank individually, but only to a central point.
What is good credit security?
Loan security is particularly good when the security can be taken up easily by the bank and a sale in an emergency is promising. Security should at best meet the following criteria:
- Easy valuation (because high valuation costs make loans more expensive and make small loans in particular unattractive)
- good interchangeability
- low potential loss of value during the loan term
- Independence from the financial situation of the borrower
Credit collateral – what is the difference?
Personal and property security. A distinction is first made according to the type of backup. This results in two types of collateral: personal security and property or real security. A characteristic of personal security is that in addition to the actual borrower, a third party is liable for the loan. This is the case, for example, with a guarantee. Real collateral, on the other hand, is based on real assets. They are primarily used for pledging, transfer by way of security, and for mortgages (land charge and mortgage).
Additional and abstract collateral. A second criterion that differentiates loan collateral is the dependence on the amount of the receivable. Is the security directly linked to the loan or loan or does it continue to exist even though the debt has already been repaid? If the security is dependent on the existing claim and therefore ends with the repayment, one speaks of accessory security.
If the credit security continues regardless of a specific claim, it is non-accessory security, which is also referred to as abstract or fiduciary security. This includes guarantees, land charges, and assignments as security. The latter is often used in car loans, where the car provides security for the loan needed to buy it.