No collateral, no loan

 

In addition to the credit bureau score, there are other factors that determine whether you get a loan or not. Banks need credit collateral so that they can hedge against defaults. What collateral exactly exists and which types of credit you can use as collateral is shown in this article.

Collateral is required

Collateral is required

You can get a loan of any amount from your bank or bank as long as your guarantee is satisfactory to the lender. That means in the context nothing more than that the value of your collateral security has to pay off for the bank. The collateral is used by the lender as a “pledge” in the event that you can no longer service your loan installments. Various factors play a decisive role in the type of loan collateral. Among other things, for what purpose, in what amount and over what term you need the borrowed money.

The trend has been steadily rising for decades: in 2017 private individuals raised loans totaling almost 1.2 trillion euros in Germany. 25 years ago, this amount was still around 455 billion.

Collateral for small loans

Collateral for small loans

Special loan collateral usually does not apply when it comes to smaller loans at your house bank. If it is a small loan up to about 5,000 euros with short, manageable maturities, good creditworthiness suffices. You should have a regular salary receipt, which leaves you with enough money after deduction of the fixed costs. In addition, your loan is matched by a positive credit bureau information as well as of age and place of residence in Germany.

For a manageable small loan with a comparatively short maturity, a good credit rating is sufficient. In most cases, the bank will use its salary to secure its risk. Through a contract clause in the contract, the institute assures itself to be able to settle the debts if necessary via your salary receipt.

Collateral secured by third parties

If, contrary to the preceding example, you are unable to demonstrate sufficient creditworthiness, there may be reasonable grounds for doing so. Are you still in education or student, you have correspondingly low cash receipts. You can still easily get a loan through a guarantor. The first condition is that the person from your family or circle of acquaintances brings with him the obligatory criteria for a guarantor. The risk is borne by another person who is liable to the bank in your place should you find yourself in difficulty with repayment.

As a guarantor you are a personal loan security

If someone asks you as a guarantor, think carefully about the matter and consider all the risks for your assets. Regardless of the relationship with this person – in extreme cases, you are liable for the loan. At least insist on the form of the deficiency guarantee. This means that the bank has to prove to you that there is really nothing to be gained from the borrower before you are ultimately held liable. In the event of payment default by the borrower, you will be held liable in the case of a direct legal guaranty.

The credit collateral mortgages, mortgages, assignments and mortgages described below are referred to as collateral (also real collateral or real collateral).

Two loan collateral for real estate

Two loan collateral for real estate

The few have the necessary financial resources to buy an apartment or a house out of hand. Debt capital is usually required for home and apartment construction as well as the purchase of real estate. Therefore, such purchases are usually financed on a larger scale. The high credit sums have correspondingly long terms. How the capital market develops in the years or decades of funding is unpredictable. Therefore, it is important for borrowers to make this commitment on attractive terms. Installment repayments and special repayments are just as important for real estate buyers as low interest rates with long-term ties.

In addition to the good credit rating, the long-term security of the lender is important. The lending conditions are better, the lower this is for the bank. This is where land charge or mortgage comes into play as conceivable collateral.

Mortgage and mortgage as collateral

To finance your new property in the best conditions, it is best to secure your loan with a mortgage or mortgage. Offer the lender a house, apartment or land as collateral. He can realize this under certain circumstances, should you and your repayments fail permanently. Both security guarantees are particularly suitable for financing real estate, but differ in some points from each other.

Mortgage: By a notary, the lien is entered into the land register of land with real estate. For current or future loans then this mortgage is liable instead of the borrower. The security that results from the registered mortgage can be flexible. So it can exist independently of a loan and apply for several loans at the same time. Once registered, the mortgage debt may simply be available even after repayment without serving as collateral. In the case of short-term capital requirements, it can continue to exist – and also because the deletion again brings costs.

Mortgage: A mortgage, on the other hand, is linked to a single loan and charges the land or property with the so-called land charge. The mortgage sinks and ends with the loan, which serves as collateral. The current grade of a mortgage is shown in the land register. This form of credit security is popular for renovations and modernization. Like the mortgage, a mortgage grants the bank, as an ultimate lender, the right to foreclosure.

Collateral security through mortgage credit

Collateral security through mortgage credit

The name already reveals it: this collateral is about the pledging of rights or assets. The creditor offers the donor as loan collateral, for example, home savings, securities or life insurance. Thus he pledges his right over the deportee to the one who lends him the money. With life insurance, the current surrender value determines how high your mortgage lending value is. By agreeing to a claim assignment, you convert such investments into collateral. Alternatively, the same possibility exists for the pledging of objects such as cars, jewelery or paintings.

Rights as objects can be used by the lender in compliance with rules and time limits, as soon as you as a borrower can no longer meet your payment obligations.

Assignment as collateral

Assignment as collateral

The security transfer is a collateral often used in car purchases. The lender gives you the money for your car, receives the car letter and becomes the owner. You are the new owner of the vehicle and pay the installments for an agreed period.

Contractually it is regulated from the beginning that until the repayment of your loan, the car serves as collateral for the lender. This also regulates the so-called security transfer. This form of collateral security is earmarked in most cases and may include, for the borrower in the example of car financing, certain additional obligations (such as the conclusion of a comprehensive insurance or a workshop bond).

This table illustrates the common types of loans and what collateral is usually customary for them:

Type of loan credit security
Small or personal loan Assignment of security or guarantee
Installment Credit Security transfer
Pfandkredit lien
modernization credit Mortgage
vehicle financing Security transfer
Real estate financing Lien or guarantee

Collateral security through residual debt insurance

For larger amounts of credit, residual debt insurance is often offered. It makes sense that this secures the borrower for its failure. For example, if the borrower loses his job or becomes chronically ill, he can no longer service the repayment installment. In this case, the residual debt insurance, which is nevertheless often criticized as an unnecessary money-eater. The conclusion of such an insurance increases the overall cost of your loan by about 10 to 20% on average.

Your aspect of collateral security is still due to the residual debt insurance, as it secures your payments and thus minimizes the risk to the lender. The bottom line is that this insurance makes the most sense in a long-term loan such as mortgage lending sense. You reduce your risk, but you should keep an eye on the increased costs right from the start. Hardly any sense as collateral brings a hedge of the remaining debt, if it is a relatively manageable loan. Even a sufficiently secured loan such as the transfer or the pledge loan does not require any residual debt insurance.

The evaluation criteria of collateral

The evaluation criteria of collateral

Just as the banks value collateral, they also have to comply with their requirements as a borrower. Sufficient collateral must be provided to ensure that you do not lose your economic capacity to act through repayment of the loan. So-called toggle contracts or immoral credit agreements are considered void.

Credit collateral offered by you are valued by banks according to the following criteria:

Value stability: For the term of the loan, it is advantageous if your loan security suffers no major loss of value.

Rating: The actual value of your collateral should be easy to identify and not subject to major fluctuations.

Commitment: To protect yourself, the bank pays attention to making your collateral easy to sell. A valuable painting that is difficult to “sell” would be an example.

Independent value: Credit security can not lose its value if you get into trouble. Your life situation and the value of the collateral security are separated.

Conclusion

Your creditworthiness depends on the credit bureau information or regular payments and savings behavior or a decisive factor. In spite of their impeccable creditworthiness, they need credit collateral with which the bank secures itself against your potential default.

Collateral helps you to get more attractive terms for your loan. Your freedom of choice in the choice of your security is manageable, the bank is the lender of the tone. However, always keep in mind the unpredictable: if you default on your loan, the bank goes to your credit security and uses it. Especially for this reason, surety bonds are also extremely sensitive. In the best case avoid this collateral security via a third party. Also, only take out a loan if you actually need one and have estimated possible consequences.

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