Loan collateral can come in many forms. Ownership housing, mutual funds and forest assets are often eligible as collateral. For banks, however, various collateral is a lifeline that protects them from borrowers’ payment difficulties. If you want to reveal the deepest secrets of collateral loan, keep reading.
Collateral Loan, ie Real Collateral
Loan collateral usually refers to real collateral, which are physical objects or documents. The ultimate purpose of collateral is to secure the repayment of the loan to the lender: if at any point the borrower goes into default or insolvency, the creditor may sell these real collateral and use the proceeds from their sale to repay the loan. In this way, the lender recovers at least part of the value of the loan.
A real collateral is a limited collateral whereas, for example, a personal collateral (or personal collateral) is an unlimited collateral, in which case the collateral provider is liable for the entire loan. The real security may also be given by a third party and also by a debtor and a third party together.
- owner-occupied house
- Other real estate (eg cottage)
- Cash deposits
- forest assets
- The state guarantee
- Loan guarantee (fees apply)
Loans that need to be secured are simply called secured loans. Secured loans are often larger in size, usually either consumer loans (about € 1,000 – € 70,000) or home loans (starting at about € 70,000). Larger loans are often secured precisely because banks have a higher risk of loss. Obtaining and granting secured loans is often more difficult compared to, for example, unsecured loans because the lender often checks the customer’s solvency and credit history thoroughly.
Value of security
The lender will independently determine the value of the property to be given as real collateral. Note that the value of the guarantee often does not correspond to the fair value of the product. In fact, banks or financial institutions often deduct a certain margin of certainty from their true value, which ensures that when the value of the item falls, there is no risk of repayment of the loan.
Most banks accept around 70% of the value of the home they buy. In this case, the new housing is of course more valuable than the old housing in terms of value. In addition to the age of the dwelling, the value of the security depends greatly on its location. Below we compare the most common collateral values for a home loan.
For example, if a new home cost € 300,000 and the bank sets the collateral value of the home at 70% of its price, then the collateral value would be € 210,000. This would mean that the mortgage lender would have to get either additional collateral or personal guarantee for the remaining $ 90,000 pot due to lack of own funds.