Why loan collateral is so important for the bank?
An applicant’s creditworthiness is a key criterion for any bank when processing loan applications. When she lends money, just like the personal loan you would get from a friend, she wants the assurance that she will see the money lent again. Otherwise, it risks economic damage. That is why the financial institution demands special guarantees in any case for the granting of loans. These differ depending on the intended use.
Credit collateral through income
For almost all forms of credit, security must be provided through a regular, fixed income. Depending on the amount of the loan, loan applicants need a permanent job and should no longer be in the trial period. Net income should indicate an amount that also indicates that the applicant has enough money left over for everyday life and will still be able to pay the loan in regular, fixed installments. In the case of an installment loan such as a consumer loan or car finance, the income usually only needs to be regular and the borrower should be able to show an employment contract; in the case of higher credits, it is also a prerequisite that this is unlimited and that the applicant is no longer in the trial period.
Credit collateral through valuables
In the case of higher loan amounts with a longer term or in the absence of security on the part of the applicant, the credit institution can request valuables or assets as additional security. Anyone who has put some money on the side can indicate this. However, since most loan applicants want to take out a loan for precisely this reason, they usually state other valuables. For example, vehicles or real estate are interesting for banks. Items that show a rapid decline in value, such as a PC, are irrelevant. Jewelry and the like cannot usually be given as security either. What may be considered collateral are securities or holdings of raw materials such as precious metals – the latter are much more attractive due to their stable value.
Credit collateral based on purpose
With real estate financing, it is generally not possible to provide security that would be sufficient for the bank, since it is such a large sum of money. In addition to equity, loan applicants therefore have to accept conditions such as a mortgage. If they are no longer able to pay the current installments, the bank reserves the right to sell the property and the property. This risk is always taken with real estate financing and should therefore bring equity capital for the sake of your own living situation, so in the end put money aside and invest this first – this is often required by the credit institutions.
Loan guarantees for start-up financing
Another special case is start-up financing, which is about making the foundation of a new company possible with the necessary financial means. This is a particularly high risk for the bank, since the company could fail and the entrepreneur would then no longer be able to repay the resulting debts. A solid business plan that attaches importance to the aspects of financial planning and can present a clear value chain as a source of income serves as the basis for the bank to look at the application at all. Collateral would be equity, collateral such as vehicles or real estate, but also guarantees from co-sponsors who (also) meet the necessary requirements of the bank.
Credit collateral through co-applicant – the guarantee loan
Basically, the chances of getting a loan approval increase if there are still one or more co-applicants. In this way, for example, risk customers such as the self-employed can also get loans or the shareholders of a company receive the loan through the collateral brought in as a group. The procedure is known as a guarantee. It is important with the guarantee that if a debtor defaults on payment, all other applicants who signed the loan agreement are consulted – guarantees should therefore only be taken if you are actually prepared to do so and have considered the risks.
Credit collateral through residual debt insurance
Some credit banks offer residual debt insurance for installment loans, car loans or real estate financing. If the borrower becomes unable to work, becomes unemployed or the borrower dies, the insurance covers the loan installments. Protection against death prevents spouses or family members from having to pay the installments. The financial risk is mitigated with a residual debt insurance. Borrowers are not obliged to take out the residual debt insurance recommended by the bank.
How are collateral assessed by the credit institutions?
Basically, it may of course be that a security has a certain value at the present time. However, the bank usually evaluates each collateral differently and, for example, likes to rely on collateral that can be liquidated immediately if necessary. In the case of a house, the case would be clear – but that would also mean that the house inhabitant loses his living space in most cases in order to be able to pay off the debt. Basically, when applying for a loan, you should consider how the bank measures the value of the security, but also what its loss would mean for your own life. Credit collateral should be affected as little as possible by the decline in value on the bank side; fast-moving objects such as technology are generally less suitable than real estate or vehicles. If you could live with it in the end, the loss of which would not have any lasting consequences.