Secured loans are a type of lending to borrowers. The loan is secured by the goods that the borrower purchased on credit and which remains in the ownership of the lender until the entire loan is paid in full. Most often found in mortgage lending, car loans and other types of lending for the purchase of expensive goods.
Pledge or security of a loan is the most common form of guarantee that the borrower will fully fulfill its obligations to repay the borrowed funds. For a lender or a lending institution, secured loans are an excellent way to reduce the risks of loan defaults, since in the event of a borrower's violation of his obligations, the bank may demand the return of the collateral, including in court.
Due to this, the vast majority of banks and lending institutions significantly reduce the interest rates on secured loans when compared with unsecured loans.
The most frequently encountered as collateral are:
- real estate objects;
- expensive movable property;
- various types of equipment;
- animals and plants;
- goods and other material values, including promissory notes, cash on deposits, antiques, jewelry.
It is important for the lender that the current market value of the collateral or collateral matches the full value of the loan. That is, the amount of borrowed funds and interest on the loan.
Most often, real estate objects are used as collateral: buildings, structures, houses and apartments. When assessing the value of a security item, many factors are taken into account: the year of construction, its location, distance from the city center, and others. For example, a new building or an apartment in a new building will be considered by the bank as better security than an apartment in an old building. In addition, credit institutions are reluctant to consider the borrower's only housing as collateral, since, according to the law, it cannot always be seized and sold at auction.
If a vehicle is used as security, it must be serviceable and not very old at the time of the conclusion of the loan agreement (usually not older than 10 or 15 years). In this case, the vehicle passport (PTS) is transferred for storage to the credit institution and is kept in it during the entire loan period.
Equipment provided as collateral for a loan must also meet certain requirements. For example, it should not be stationary, unique and highly specialized, since these factors will not allow selling it quickly. At the time of the conclusion of the loan agreement, it must be serviceable, and the year of issue and the level of depreciation must meet the requirements of a particular lender. Banks often require that the pledged equipment has an inventory number so that there is no problem in identifying it.
A number of requirements apply to agricultural livestock (crops). The age of the animals should not exceed a certain number of years, for the entire loan period they should be provided with normal conditions of detention. All livestock must have individual inventory tags to verify the presence and safety of collateral.
Inventories (goods and materials) in the form of goods in circulation are often provided by borrowers specializing in buying and selling. However, credit institutions are reluctant to accept this type of collateral, since inventory and materials have an increased risk of loss. Therefore, accepting them as collateral for a loan, banks must be sure of their high liquidity.
