Collateral always increases the borrower’s chances of obtaining a loan from banking institutions. If, in the case of an application for a loan, the borrower undergoes a check of his credit history, the level of solvency and financial condition in general, then thanks to the pledge, this procedure is greatly simplified, since the bank has a guarantee that will cover all his financial costs. So what is collateral and what are the benefits of collateral lending?
What is a pledge?
A pledge is a guarantee of the borrower’s fulfillment of its financial obligations to the lender, in which the borrower undertakes to pay the entire amount of the loan and interest on it, and in case of non-fulfillment of its obligations grants the bank the right to receive property or other tangible and intangible assets owned by the borrower. That is, collateral is, in simple words, providing the bank with any of its value, in case of non-payment of the loan.
Two parties take part in collateral lending:
- a pledger (lender) is a natural or legal entity that provides a sum of money in exchange for an asset, as a rule, it is the property at the disposal of the borrower;
- the pledgee (borrower) is a natural or legal person who undertakes to pay the amount of money and interest for the use of the amount in exchange for his asset, which he undertakes to give to the pledger in case of non-payment of the amount taken.
Sometimes, financial relations may include third parties or third-party organizations that are guarantors of the lender or borrower. The guarantors provide the interests of any of the parties in the process of interaction for a fee.
The borrower can be represented not only by banks, but also by any organizations providing financial services. Pawnshops, which provide money in exchange for jewelry and equipment, are a striking example of loan lending. Residential and non-residential real estate, securities, a car, fixed assets of an enterprise, precious metals can act as collateral.
Types of collateral in Ukraine
There are currently five main types of collateral in Ukraine:
- Mortgage – real estate acts as a debt obligation. The transfer of the borrower’s property into the full possession of the lender in case of non-fulfillment of the loan obligation is regulated by the Law of Ukraine: “On Mortgage”. All property that is the subject of a loan agreement is subject to state registration. In the contract, depending on the amount provided, there may be one property object or several. The property may be a state organization, a municipal enterprise or an organization of another form of ownership. The subject may also be a building that is under construction and the transfer of ownership will occur after completion and registration of the property.
- Mortgage – movable property acts as a debt obligation. The value of the collateral should cover not only the amount borrowed and the interest on it, but also all the costs that the creditor will incur during the renewal of the property. Movable property can be any valuable asset that does not relate to real estate, in simple words — these are securities, a vehicle, weapons, museum exhibits.
- Property rights are a debt obligation that can be transferred in the future. Property rights may arise, both at the time of the conclusion of the contract, and after a while. This is a special type of pledge, since the subject can be their own rights to property and rights to someone else’s property.
- Rights to securities — a transfer record for any type of security secured. These can be promissory notes, bonds, shares, which will be transferred to a credit institution on the basis of an endorsement.
- Collateral goods in circulation. The subject of the pledge can be any product at the enterprise that is at the stage of processing – semi-finished products, raw materials for further finished products, component parts and the like.
The main advantages of collateral
We have already defined what collateral is and its main types, it remains to understand its advantages over other forms of credit.
Since situations often arise when it is necessary to receive a large amount of money at once, many are looking for such organizations and forms of credit in which it is possible to do this. The advantage of a secured loan, first of all, is that a financial institution can provide cash at the time of application. The borrower submits an application to receive the required amount. A financial institution does not waste time studying the credit history and financial well-being of the borrower, but can instantly draw up a loan agreement with the issuance of a credit card or cash. The size of the loan rate varies depending on the type of credit institution, the maturity date and the amount borrowed and is calculated separately for each specific agreement.
Banks can issue loans up to one million hryvnia under certain conditions. On the official website, you can find loan programs secured and calculate the repayment amount thanks to credit calculators.
The procedure for obtaining a loan is very simple, no additional documents are required from the borrower, except for a passport and documents for collateral. The property is registered as collateral, and the borrower signs all the necessary contracts.
The only condition for granting a loan is the majority of the borrower. The property may not be in his ownership, which he provides as collateral. The estimated value is determined by market standards. All costs during the registration of the deposit are paid by the bank. After signing the contract, the borrower receives the full amount immediately.
What can be used as collateral?
The subject of the pledge — what is it? The pledge is determined by any property of the debtor, which is commensurate with the amount of the loan body, the interest for use and all costs incurred by the creditor. This can be any movable and immovable property owned by the borrower, as well as with the property rights of a third party willing to vouch.
Individuals can exhibit housing, cars, securities, precious metals, rare items and much more as property.
Legal entities, in order to cover their debt obligation, can use fixed assets and finished products on the balance sheet of the enterprise, as well as funds in the process of creation.
If things that are prohibited from being used as collateral by the law of Ukraine, they include:
- Any real estate that at the time of compilation or in the future will be seized by the state.
- Shares and land plots that are not privately owned by the borrower.
- Manufacturing companies, farm plots and agricultural enterprises.
- City and municipal assets of the state.
- The property that is being sold.
- Assets that are already secured by other credit institutions.
How to make a deposit correctly?
When concluding a mortgage lending agreement, the parties assume certain rights and obligations that, according to legislative acts, they must fulfill.
The lender is obliged to insure the object for its full estimated value. All financial costs must be paid by the borrower. The insured property can be used, however, its integrity cannot be violated, as this will entail either an early replacement of the object or a revaluation of its value. The estimated cost is made by the commission. During the conclusion of the contract, the lender warns the borrower about the damage to the property or its loss. The borrower is obliged to report on the use of the collateral loan object and provide relevant certificates.
The lender is obliged to return the ownership of the object as soon as the borrower fulfills all his financial obligations, this may be the specified term under the contract or early repayment of the loan with payment of all interest and expenses.
To properly apply for a loan, the first thing you will need to do is to familiarize yourself with the basic conditions of a bank or other financial institution. Conditions and loan programs are not standard and will differ everywhere, so it is better to choose a more comfortable one for yourself. For the execution of the contract, the borrower provides: a passport of a citizen of Ukraine, TIN, income documents and a marriage certificate, if available.