Collateral – securing credit in practice

It is not uncommon in everyday banking life that a loan has to be secured – this can have several reasons. It is possible, for example, that the borrower’s creditworthiness does not appear to be sufficient for a loan to be approved.

It is equally conceivable, or at the same time applicable, that the bank would like to minimize the risk of default due to the amount of the loan and that it will be necessary to provide loan collateral accordingly. What sounds rather bloated in theory is actually relatively easy to understand in practice.

Properties of the collateral

Properties of the collateral

It is of course important for the banks that they can actually use the respective collateral, because otherwise they are not really useful as collateral for loans. One of the main requirements that banks place on collateral is that the collateral can be converted into money quickly and easily – for example, without having to remove legal obstacles.

It is also important that the loan collateral does not fluctuate significantly or not at all in value – this applies in particular to the duration of the loan term, whereby increases in value are of course more accepted than losses in value. It is also assumed that there is no positive correlation between the security of the loan and the economic situation of the borrower, but this does not really occur in the day-to-day life of a bank. If the credit security is still insolvency-proof, it is purely a matter of security that the banks accept.

Common collateral for lending transactions

Common collateral for lending transactions

In practice, the theoretical possibilities are basically reduced to a fairly manageable number of possible collateralizations. The group of assignments or assignment of claims represents a majority, because this includes:

  • comprehensive insurance (vehicle financing)
  • Fire insurance (real estate financing)
  • Life insurance (death risk)
  • Capital-forming life insurance (loan repayment)

Guarantees are also very common in everyday banking, whereby the concept of surety, which acts as a deterrent to many, is often avoided and instead a second borrower is required in the loan agreement, although this is actually simply a guarantor. A distinction is made between guarantees from relatives, the spouse guarantee, guarantees, letters of comfort and guarantees from partners.

In practice, of course, securing loans using land charges is also common, but mortgages can only be found in ship financing in the form of ship mortgages, but not otherwise, since mortgages are ancillary collateral (that is, they are “already used” ).