Types of loan collateral – what you should know?

In recent years, “life on credit” has become synonymous with being among many young people. We borrow not only for apartments, but also for their equipment, cars, holidays, studios and small pleasures. Of course, getting a loan is not a simple matter, and banks are paying more and more attention to the so-called type of debt security. What is this and what type is the most beneficial for customers?


Why do banks demand collateral for a loan?

loan collateral for a loan?

First, it should be clarified that a bank or other financial institution is not a charity, which means that it is profit-oriented. One of the main goals of their business is financial stability, which they achieve thanks to security. They guarantee that after the time specified in the loan agreement, the entire amount borrowed will return to them along with accrued interest.

The bank decides on the type of collateral based on a risk analysis. Of course, the most convenient option for the customer is the lack of the need to engage your assets or other people. We hope to receive a loan based on our ability. However, in some cases it is not so colorful and the financial institution requires additional security. It is in our interest to make it as attractive as possible in the eyes of the bank, because then we can count on more favorable credit terms.


Types of loan collateral

Types of loan collateral

There are many forms of loan collateral and it is the bank that decides which of them will be most appropriate in a given situation. The division of types of collateral depends on individual criteria, but the most common classification is about personal and collateral material.


Personal loan collateral

Personal loan collateral

  • Surety – the most popular form of security, in which it is required to find a girder. He undertakes to repay our debt if we fail to comply with the terms of the contract.
  • A blank promissory note – it obliges a person indicated on this security to pay a certain amount within a specified period.
  • Awal – bills of exchange, is a third party’s obligation to repay part or all of our debt. This surety is irrevocable.
  • Bank guarantee – often used in domestic and foreign trade. In this case, the guarantor is a bank that undertakes to repay our debt to another bank. However, this is quite an expensive option.
  • Power of attorney – the bank receives full right to manage funds on the borrower’s account.
  • Assignment of claims – this is a transfer of claims to a third party or business entity. The transaction takes place without the debtor.
  • Joining the debt – the third party undertakes to pay the debt and it is referred to as joint and several debtor. However, this does not mean that the debtor is released from the obligation to repay the debt.
  • Assumption of debt – the lessee takes full responsibility for paying off the debt.


Material collateral for the loan

Material collateral for the loan

  • Mortgage – mainly applies to real estate. An entry in the land and mortgage register is required, which ceases to be valid after full repayment of the debt.
  • Blocking funds on the account – it is possible when the debtor receives regular inflows to the account. The blockade loses its validity after paying off all the debt.
  • General pledge – reports to movable property which has property value. On its basis, the creditor may assert his claims. The debtor has no right to use the pledged movable property.
  • Registered pledge – most often it concerns a leasing contract. In this case, an entry in the pledge register is required, but the debtor has the right to use the movable property.
  • Deposit – it can only be in cash. The debtor is obliged to transfer a certain amount to a financial institution.
  • Transfer of ownership as security – the ownership of movable property is transferred to the creditor. The debtor, however, has the right to use such a secured item.
  • Insurance – provides security if the borrower dies or is unable to perform any paid work.

Regardless of the amount of our commitment, you must reckon with the fact that the bank will ask you to provide specific security. The larger the loan amount, the greater the requirement for a guarantee of repayment. After all, this is money borrowed and it is not surprising that financial institutions want to be sure that the entire amount will be returned to them.

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