What are collateral? (relative to a loan)
The term collateral can occur in all variations, but especially it is used in banking. For example, a bank requires collateral before lending to ensure that the loan is secure. Those who can not provide such collateral will usually be denied for the loan.
What collateral is meant for lending?
In general, the bank earns the credit, as we know from the interest they pay for the loan in addition. However, a loss on the part of the customer can mean quite high losses. For example, in real estate loans, which are often in the six-digit range. Loans for construction projects often approach the million, many other loans as well. For this reason, collateral should protect the loan as much as possible so that the bank does not incur losses. For real estate, the property itself serves as collateral, also the income of the borrower and the already existing assets. This can be provided in the form of a pledge or as a land register entry. Failure to comply with the loan agreement will allow the bank to access the objects or collateral.
Other collateral for the loans
Smaller loans can also be secured with a guarantor or a second guarantor. If one’s own creditworthiness is insufficient, a second person can take the blame if the main borrower fails. This in turn must be able to have its own securities to meet the bank. Besides the guarantors, of course, valuables can also serve as security. In addition, banks also describe a permanent employment as collateral and also down payments on a loan are considered positive.
Of course, the 100% security for the bank does not exist, unforeseen events can always occur. Nevertheless, the risk can be minimized in advance and that’s what it’s about when it comes to collateral.