Forms of loan security: types, requirements of banks and methods of verification

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

A person who takes out a loan may not know that there are several forms of loan security. This is a serious gap in education, because such information is necessary at least in order to correctly weigh the pros and cons. So that you learn to think before taking out a loan, we will tell you everything in detail.

Definition

What is a form of loan security? Do not know? What is direct support? Don't know either? Then you definitely need to read our article.

So, collateral is a kind of collateral that can be withdrawn from the owner, and subsequently sold through an open auction. All these actions will take place if the borrower fails to fulfill his obligations, that is, repay the loan.

If you look at the legislation of our country, it says that a loan can only be issued under certain forms of loan security. This was done so that the lender also hadguarantees, because he must know that even if the borrower does not pay anything, the money will not be lost.

Usually, loan collateral may be needed if a person wants to borrow a large amount. To make sure that the client has the funds, and the issuance of a loan does not turn into a loss for the bank, an agreement is signed between the two parties. The latter en titles the bank to use the collateral for its own benefit.

Types of collateral

So, what are the forms of loan security? To minimize all possible risks, credit organizations, before issuing a loan, require the applicant to confirm solvency. This is due to the fact that the bank needs guarantees that the money will be returned to it.

What can be collateral?

1. Guarantee.
2. Bail.
3. Assignment of claims.
4. Other shapes.

Most likely, the list didn't explain much. To fill in the gaps, we will consider each form of loan security separately.

Bail

Pledge is the most popular security method. The borrower immediately recalls all his obligations to the banking organization. Is the conscience awakening? No, rather, the realization comes that in case of failure to comply, he may lose some property.

This form of loan repayment security is divided into two categories:

1. Pledge of property rights.
2. Pledge of property values.

In the first case, we are talking about all sorts of rightsdebtor, for example, it can be copyrights, the rights of the customer under the contract, or the rights of the tenant. It seems easy, but there are a few nuances. For example, copyrights can only be pledged if they do not generate dividends or benefits.

The second category is characterized by luxury items, antiques, precious items, real estate or deposits. It turns out that in a situation where the borrower does not fulfill his obligations, the lender has the right to receive property value that can be sold at auction. Then the money after the sale will be used to pay off the debt and the bank will not incur losses. Usually, real estate collateral is chosen as a form of security for repayment of a loan.

That is, the borrower is aware that in which case they will take away his apartment and put it up for auction. This moment should stimulate the defaulter, and show the bank that the person is serious about the loan.

I would like to add that usually both banks and their clients choose a material thing as collateral. This is due to the prospect of selling, because some item or value is much easier to sell than the rights to something.

Where is the deposit kept?

This form of collateral for bank loans, such as collateral, may remain in the custody of the client, or may migrate to the bank. This question is based on several factors. First, the size of the loan. The larger the amount, the calmer the bank if the valuable thing is with him. Second, the policy of the banking organization.

But even if it happens that the thing remains with its owner, then the freedom to use itwill be limited. For example, the value can no longer be donated or sold until the loan is fully repaid.

Creditor rights

Since collateral is a popular form of collateral for bank loans, appropriate laws have been adopted. For example, the lender may from time to time check for the existence of the value that was left as collateral, or monitor its condition. If the collateral is damaged or lost, the banking organization has the right to require the borrower to quickly repay the loan. Another scenario is the replacement of collateral for another at the same cost.

Collateral is the main form of collateral for a loan, which means it must meet certain requirements. What are these requirements?

1. The value must be owned by the borrower. Owners other than the debtor are not allowed. Sole proprietorship can only be confirmed with the help of documents, no one will believe a word.
2. The item is estimated at a certain amount, which is confirmed by the relevant documents.
3. The value does not appear as collateral for the owner's other loans.
4. The item should be in demand, if suddenly it has to be sold. Most often, banks put forward this condition as a must, because they are interested in a quick sale.

Guarantee

Among the main forms of collateral for a loan is a surety. What's this? This is the name of a written obligation of a third party to repay a debt, if from a participant in a loan agreementit is not possible to get a loan. Interestingly, this method of security is used not only by individuals, but also by organizations and companies.

The form of collateral is such that the deal is between three parties. Moreover, the third party must be aware that in any unpleasant situation, all obligations will fall on it. The guarantor is also obliged to cover part or all of the borrower's payments and control the entire debt repayment process.

The third party confirms its obligations in writing in addition to the standard loan agreement. If you need to make any changes to the document, then the banking organization will first need to notify the guarantor and obtain his consent. If this order is not followed, all changes in the contract will be invalid.

End suretyship

Guarantee as a form of securing the repayment of a bank loan is considered closed in the following situations:

1. The agreement has expired.
2. Changes were made to the text of the contract, but the guarantor was not notified and no one asked for his consent.
3. The banking organization received all the money in full and has no claims.
4. The debt was transferred to another person. An important condition for this is the lack of information of the guarantor and the lack of his consent to such changes.

Bank guarantee

Another form of credit security. Its essence is to carefully carry outall conditions of the loan agreement with the credit structure. In this case, the guarantor is financial institutions, various structures that provide insurance services. This point is enshrined in the Civil Code of our country in article 368.

To put it simply, a guarantee is a one-way deal, under which the guarantor provides written statements to the credit institution.

The guarantor must indicate that he is ready to repay the balance of the debt in advance if the borrower cannot do this for any reason.

Classification of guarantees

Guarantee is a modern form of credit security, and like any modern form has a classification.

They are classified according to certain parameters:

1. Unsecured and secured. The second option involves a simple written obligation, which indicates the guarantee of repayment of the debt if the borrower is unable to fulfill his obligations for some reason. In the case of the second option, we are talking about collateral for a loan with certain property. In this case, the condition of the bank is the equivalence of the loan and collateral.
2. Unlimited and limited. Unlimited are those cases when the guarantor is obliged to cover the full amount of the debt. The latter include the effect of a guarantee on some part of the debt. By the way, the issue is being resolved at the stage of signing the contract.
3. Cooperative. We are talking about debt obligations by the main firm in relation to its branches and divisions.
4. Personal. When guarantees are given by individuals or groupspersons.
5. State. We're talking about government commitments for loans to businesses, communities or community organizations.

Warranty policy

Guarantee is a form of security for the repayment of a loan, which means that there are certain rules when it is issued. They are regulated by law and cannot be violated. The main thing that is reflected in the law is that the guarantee begins to operate at the moment when the contract is signed. But this rule only works if the guarantor was paid a reward for the support provided.

The analysis of the forms of collateral for loans issued by commercial banks and state is such that it allows you to highlight certain situations when the transaction is canceled. They are as follows:

1. The guarantee expired and the parties did not renew their cooperation.
2. The borrower has closed all the debt to the credit structure. It is important that the latter does not have any claims regarding the return of the amount.
3. The credit institution refused to provide additional guarantees for the loan.

Concession

Another form of securing the repayment of a loan in modern conditions is a concession. For greater convenience, this form is called a cession. What it is? This is a documented agreement, according to which the borrower submits his requirements to the banking organization to confirm the security of the return of funds.

According to the document, it turns out that the bank can use money only fordebt repayment. If the amount received exceeds the loan obligations, the bank is obliged to return the difference to the borrower. There are two forms of concession:

1. Open. According to this form, the debtor must be notified of the assignment of claims. That is, the borrower repays the debt to the bank, and not to the borrower.
2. Quiet. The debtor does not know that the claims have been assigned. He pays the amounts to the assignor, and the latter already transfers the money to the banking organization. This method is the most beneficial for the borrower, because thanks to it you can not ruin your reputation.

Methods to ensure loan repayment

Any bank seeks to minimize its own risks and for this it develops certain tools that help not only control the borrower, but also influence him. Usually such tools are trade secrets, but there are still some rules that are most often used by banking organizations.

1. Issuance of loans to regular customers. If a random person receives a loan, it will be a very small amount.
2. Limitation of loan terms. The shorter the loan term, the faster the bank will get their money back. Thus, the bank risks minimally in the current situation.
3. Passive assessment of solvency. What is the point? First, a person is given small loans, after which the amount of a possible loan increases by default.
4. If the client chooses collateral, the bank carefully chooses the values offered. As a rule, items that have defects, low liquidity or lack of demand, the bank does nottakes.
5. The more loans, the more security. This is the task of the lender, because only in this case can we talk about small risks.

Unconventional Shapes

What non-traditional forms of loan security do you know? We bet none. We'll tell you about some.

A slightly unusual form of security is a deposit. If a person has a deposit that exceeds the amount of the loan, then it can act as collateral. An even bigger plus will be that the deposit is in a banking organization, where the client wants to take a loan.

It is foolish for the bank to refuse such an option, because in which case the balance of the debt can be written off from the deposit account. Mandatory payments can also be debited from the latter if there is no money on the current account.

It is also quite convenient for the borrower, because the deposit confirms solvency. But there is also a minus - the client will not be able to freely dispose of the money in the account or close the deposit ahead of time.

Forfeit only at first glance does not apply to the form of loan security. In fact, everything is much simpler and possible. The pen alty is the amount that the debtor will have to pay if he misses the payment. It can be in the form of a pen alty or a fine. But this does not mean that only one type of pen alty can be applied during the term of the loan agreement. The law allows different options to be used in different periods.

It can be said that the pen alty does not fully apply to the forms of security. But she is peculiarpayment for the time that the banking organization did not receive interest, and hence income.

For this reason, we can conclude that the pen alty is not a form of loan security, but for small loans it fits perfectly. Any bank for a serious loan will require more significant collateral.

Verification of collateral

We have de alt with the forms of collateral for the return of issued loans, but have not yet talked about how the collateral is checked. We think now is the time.

So, the check calculation form was developed by the National Bank, taking into account proposals from commercial banks.

Checking the security of loans on this form is carried out by borrowers of all forms, including commercial structures. There are slight differences, for example, in the latter, only those positions are filled that are responsible for the nature of the activity and the structure of the balance sheet.

If there is a lack of collateral, it is immediately recovered. Moreover, further lending continues, but the conclusion of new agreements is being questioned.

Commercial banks are obliged to impose more stringent requirements, because they are obliged to support those enterprises that have developed effective programs for overcoming the crisis, re-profiling or reorienting production to produce the necessary goods.

When checking, it must be proved that the main sources of the formation of working capital are the profits of organizations and enterprises or funds from the sale of securities.

In addition, the bank should think about risk reductionnon-payment of the debt, which means carefully issuing loans to economic agencies that have opened a current account in another bank. When concluding an agreement, it is necessary to determine the method of repaying not only the debt, but also the interest.

The following method is considered the most profitable: the borrower transfers means of payment within a certain period of time using a payment order. If the borrower does not pay off debts for some reason, then the bank has the right to go to court the next day (after the expiration of the payment date).

Obligations and rights of the pledgor

Let's talk about this rather serious topic. What for? Yes, because even after the term bail is deciphered, not every person is aware of their rights, and even more so their obligations.

So what can a pledger do:

1. Own value. We are talking about a mortgage loan or a car loan.
2. Use the pledge. Again, we are talking about a car or real estate.
3. Borrower retains ownership.

What is the borrower required to do?

1. Provide necessary storage.
2. Insure value with your own money. And we are again talking about a car or an apartment.
3. Transfer pledged property.
4. Reclaim property if third parties have illegally taken possession of it.
5. Check the safety and availability of value.
6. Demand the return of property if the obligation is properly performed.
7. Demand the return of the remaining amount after paying the loan, when the banking organization sells the item.

Risks and insuranceloans

What is credit risk? The fact that the bank will incur losses due to late repayment of the loan by the borrower or the latter will completely refuse from obligations.

Lending operations are considered not only the most profitable, but also the most risky. If several large loans are not returned to the bank at the same time, then it may go bankrupt. Moreover, bankruptcy threatens not only the organization itself, but also all individuals, enterprises and other related banks.

What are the levels of credit risk?

1. Risk by separate agreement. If the borrower does not fulfill its obligations under the loan agreement.
2. Portfolio risk. Risks under all loan portfolio agreements.

What is the amount of credit risk? This is the amount that is lost when the payment is late or the debt is not paid.

There is also such a thing as the maximum potential loss. In this case, we are talking about the full amount of the debt that the client did not pay.

It is important to understand that late payments are not direct losses, but are considered indirect losses, which are interest costs or loss.

Conclusion

As you can see, the subject of loan collateral has quite a few nuances. You need to know them all in order to clearly understand what you are going for.

If you mindlessly take a lot of loans, and then do not know how to pay them off, then this tactic will end very, very badly. You will not only be left penniless, but also lose some property and gainbad reputation among banking organizations. Perhaps the moment will come when it will be vital to take a loan, but this will not work because of problems in the past.

To date, a bill has been passed that prohibits a person from having loans for more than half of the monthly salary. And this is really right, because otherwise people will simply have nothing to live on and pay their debts.

Have you met such families where people have huge debts and obligations, while there is nothing to buy even a carton of milk? If so, think carefully before taking out a loan. You don't want to live like this, do you? Everything related to finances needs to be checked several times, including your chances of paying out.

Calculate correctly your possibilities, both financial and moral, and do not drive yourself into a corner with huge debts, and then everything will be fine.