Is debt a security
Loan collateral: No loan without collateral
Anyone who lends money to other people must be able to trust that they will get the borrowed capital back. The saying “friendship ends with money” shows that even a trusting interpersonal relationship cannot replace security when borrowing money.
Credit security or credit protection refers to the minimization of the credit risk through overwritten valuables, rights or the creditworthiness of other parties.
This means that loan collateral is the prerequisite for a bank to grant a loan. In this way, the bank protects itself against default by the debtor. Without the appropriate collateral, the applicant will not receive a loan. If the appropriate collateral is given, a credit comparison is advisable in order to get an initial overview.
Collateral can be of a diverse nature and range from attachable income to the registration of a land charge or a guarantee. Regardless of property or personal security, the amount of credit security corresponds to the amount of the credit volume.
Requirement of additional securities possible
If the loan collateral loses value during the term of the loan or if a loan is topped up, the bank can request additional collateral.
Bank requirement for loan collateral
Various criteria are important for banks when they accept loan security:
- Easy assessability
It must be easy for the bank to determine the value of the security deposited.
- Little depreciation
The security should not lose value at all or only to a small extent during the loan period.
- Easy marketability
It is important to banks that the collateral can easily be sold to other creditors.
- No connection to the economic situation
The value of loan collateral should be independent of the borrower's financial situation.
No obligation to provide collateral
Banks are not legally obliged to use loan collateral. However, it is in the banks' own interest to limit the risk of default on loans and thus also to minimize the burden on their own funds.
Types of loan collateral
Loan collateral is generally divided into two classes, personal collateral and real / tangible collateral. The type of security that is ultimately used depends on the respective credit institution, the type of loan and the creditworthiness of the borrower (s).
Personal security is also called personal security. In this case, a third party is liable for the loan amount that a consumer takes out. The creditor, usually the bank, may approach the person who provided the security directly in the event of arrears or default.
The prerequisite for personal security to be sufficient for lending is that the third person is himself creditworthy and has sufficient creditworthiness or collateral.
There are different types of personal security. These include the guarantee, the assumption of debt or the letter of comfort. The most frequently used form of personal security in the private customer sector is the guarantee.
The guarantee stipulates that a third party will be responsible for the loan that the borrower took out. In the case of guarantees, a distinction is made between the absolute guarantee and the default guarantee.
The default guarantee is the most widely used form of guarantee. The surety only has to be liable after the creditor's litigation against the debtor has been unsuccessful. The absolute guarantee gives banks the opportunity to access the surety's assets immediately.
He is liable in the same way as the borrower. After paying off the debt for the borrower, he has to take care of getting his money back.
Relatives often vouch for borrowers because this is where the relationship of trust is best. Business partners or friends are also conceivable as guarantors. In principle, anyone of legal age can become a guarantor. Whether a bank will accept the guarantor is another question.
Spouses shouldn't necessarily guarantee the other partner. In court, such a guarantee is often classified as immoral, as the emotional connection prevents the guarantor from rationally rethinking the guarantee.
Real or factual securities
With so-called real securities, the borrower hands over the rights to things to the lender. For example, the bank has rights to assets or land belonging to the debtor. Real certainties are also called real certainties.
Real collateral is not always necessary for lending. In the case of small loans in particular, proof of a regular income and a good credit rating are usually sufficient.
Land charge and mortgage
Land charge and mortgage are loan collateral that relates to immovable items such as real estate or land. The land charge is mostly used for mortgage lending. It is particularly suitable for this, since real estate has stable values and the valuation is usually relatively easy.
Banks thus secure this loan security for a long period of time that real estate financing usually requires. The mortgage is used to finance renovations or modernizations of real estate.
If the borrower can no longer meet his obligations, the bank has the right, via the mortgage or land charge, to ultimately get the money back through a foreclosure sale of the property.
The fundamental difference between a land charge and a mortgage is that the mortgage is repaid from the land register when it matures, and after it has been repaid in full. The land charge remains entered in the land register in the same amount over the entire term of the loan, even after full repayment.
Loan security through land charge entry
Once a land charge has been entered, it can later be used as collateral for further loans.
Liens on movable property
Mortgage or land charge are liens on real property and are collateral that secure a claim. In this case, the lien relates to an immovable property such as real estate. There is also the right of lien on movable property. Since the lien always relates to a specific claim, it is an accessory collateral.
An important prerequisite for exercising the lien is that the obligee is in possession of the thing. Banks therefore rarely use the lien on movable objects today.
In order to create a legally established lien on movable objects, the pledgee and the pledgee must agree on the lien. For the right to actually take effect, the thing must be handed over to the pledgee. For this reason, too, claims are usually only used as a pledge, for example when entering a land charge.
Transfer by way of security
The transfer by way of security works according to the lien. However, the borrower only surrenders ownership of a movable property to the bank in trust. He remains in possession of the thing and may continue to use it. Thus, the transfer of ownership belongs to the fiduciary loan collateral.
If the borrower cannot meet his obligations, the thing assigned by way of security will be confiscated. The bank can then resell the item. In practice, transfer by way of security is used when buying a car. The borrower finances his car through the bank. To do this, he gives the vehicle registration document to the bank. After the loan has been fully repaid, the borrower is in full possession of the car.
Assignment of claims
Borrowers can use assignments in various forms as collateral. The assignment is also called assignment. Specifically, this means, for example, that borrowers can assign their monthly wage claims to the employer to the bank.
In the event of a payment default, the bank can then contact the employer directly and collect the money. Real estate financing is also often secured with the assignment of receivables. In this case, the borrower assigns his claims from a capital life insurance. If the installments can no longer be repaid, the bank has the option of repaying the debt from the capital cover of the life insurance.
The assignment of claims is therefore particularly suitable for borrowers with an open-ended employment contract or for debtors with their own life insurance.
The role of the security agreement
The security agreement is part of the security agreement. Further terms for the security agreement are also declaration of purpose, security declaration or security purpose agreement.
In this contract, borrowers and lenders agree which collateral is to be provided for a loan. In addition, the lender undertakes in the security agreement that he will only use the security for this purpose.
The security agreement is most often formulated when a land charge is entered. The security agreement is recorded in writing as part of the contract.
A distinction is made between broad and narrow security agreements.
- Broad security agreement: With the broad security agreement, the security of the claim is confirmed for all existing and future claims.
- Tight security agreement: In the tight security agreement, security is only associated with a clearly defined requirement.
Check the security agreement carefully
Before signing the security agreement, borrowers should ensure that the bank is not allowed to assign the claims, including all collateral, to a third party, especially in the case of a land charge.
Compensation by security agreement
If the bank sells the land charge without a legally valid transfer of the security agreement to the new creditor, the borrower has the right to compensation.
Realization of loan collateral
In order for the bank to realize loan collateral, there must be outstanding receivables that have not been paid. At the same time, the collateral must be effective at all.
If, for example, borrowers no longer make the installment payments agreed in the loan agreement and they are insolvent, the bank may realize the security agreed in the security agreement.
In the specific case, this means that the bank has the right to auction off a property. The proceeds from this auction will be used to meet the demands. Usually, when entering a land charge, the borrower grants submission to foreclosure. This addition can also be agreed in the security agreement.
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Creditworthiness as a deciding factor
A bank checks all the more whether its customers are creditworthy. Creditworthiness is made up of many different individual aspects that are checked by the bank. On the one hand, the bank can use SCHUFA information to obtain information about existing receivables or loans.
On the other hand, the bank receives further information on whether the applicant is creditworthy via account statements and proof of income. The worse the borrower's credit rating, the more likely it is that the bank will ask for more collateral.
Collateral improves creditworthiness
Larger purchases such as real estate or vehicles can usually not be covered by income. That is why the banks require appropriate loan collateral even with a very good credit rating. As a rule, customers do not have any freedom of choice here, rather the bank provides the required collateral.
However, consumers can suggest additional collateral. The bank then decides whether the collateral is sufficient for the loan in question. Anyone who cannot offer collateral or a good credit rating still has the option of obtaining a loan, for example via the so-called Swiss loan or the loan without Schufa.
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