What is a pledge?

If the customer is in urgent need of a loan of a large amount of money, he may apply to any financial institution (bank, microcredit organization, pawnshop) for a loan on the basis of the collateral, which he uses as a guarantee of his long-term commitment. The financial institution will require from you a document certifying that you are the owner of the property and can dispose of it freely. So, for starters, it’s worth looking at the concept of collateral, what is it, how do you use it, and what are its benefits?

What is the value of collateral?

Collateral is an asset owned by the borrower and which the borrower is prepared to transfer to any financial institution that has lent it credit. For banks and pawnshops in MFIs, collateral is a guarantee of a refund that fully covers all costs associated with the provision of financial services as well as the privatization of property. For a borrower, it is a guarantee of a loan, since the bank is fully insured and can issue a large sum without complicated verification procedures. Bail is required only if the borrower needs a large sum of money. If the price of the question is UAH 15,000. You can go to the first IFI, you can give them passport information and you can have it in cash within an hour. No income certificate or guarantee is required.

Collateral may be movable and immovable, but may be valued in different amounts. The most valuable are apartments, cars, private houses, land, antiques, securities, assets of the enterprise or funds in processing. It is also possible to pawn minor less valuable items: telephone, household appliances, perforator and much more. The value of the collateral is estimated before the contract is concluded.

What happens if you decide to sell the collateral?

In case the borrower realizes that he will not be able to repay the loan, he has a desire to sell the property with a hammer. Banks have no intention of taking the borrower’s property by all means and selling it, earning money for themselves and leaving the client with nothing. Those financial organizations that value their reputation first want to settle the relationship with the client and settle the issue on mutually advantageous terms. As a result, even more clients have taken out loans without fear of losing their property. Collateral can be sold not only to the bank, but also to the borrower, and this benefits both parties.

Benefit for the borrower in the greater amount of money that it can receive from the sale of the property. Since the person who sells, sets on «goods» its price. The value of the property may be approximately 15 per cent higher. The only thing you have to be ready for is by the time, because the sale can take a long time. Another significant benefit for the borrower will be the bank’s ongoing control and regulation of the entire sale process. In addition, if the borrower is short of a certain amount, the bank may lend it, but under another loan agreement comparable to a mortgage.

The sale is as follows: The buyer enters an advertisement, which is placed either on the official website of the banking institution or on another resource. Communicates with the seller by contact telephone, in case of satisfaction and price, drafts the contract of sale and hands the agreed amount of money to the bank if it is the seller. The bank takes its share, which covers the body of the loan and the interest rate, as well as all costs associated with the sale of the property. The balance is paid to the borrower.

Is it worth to buy collateral?

In practice, there are two ways of selling collateral: a voluntary sale that is made with the owner’s consent or initiative, and a compulsory sale when the bank confiscates the property.

Voluntary sale is the best way to deal with a difficult situation where the borrower realizes that he will not be able to repay the loan amount and not accumulate interest, but decides to repay the body of the loan immediately. In this type of transaction, two parties benefit, as the borrower may have money left over from the sale, and disputes where the sales contract may be invalidated are minimized. There is also a benefit for the bank – the institution closes the loan contract and takes its money that can be used in circulation.

The only minus of this transaction is the price. On such a sale you cannot «profit» and the property is sold at market price. The bank controls the validity of the transaction.

In the case of a forced sale, the price of the property falls very much, as it is usually carried out at auctions starting with a minuscule starting price. As a rule, the value of real estate at auctions is 25-40% lower, which is a significant loss for both the bank and the borrower. The risk of forced sale is much higher, as there is no complete control over the property and suddenly there are people who have the same rights to the property as the borrower. Then the sale is delayed and the case may go to trial. Another negative development may be an application to the court of the borrower itself to invalidate the contract.

What is a pledge?

How do you value collateral?

Collateral is valued as follows: the higher its liquidity, the higher the price will be stated. The most liquid is considered to be:

  • land;
  • apartments;
  • houses;
  • business building etc.

However, antiquities may become assets and may potentially increase their market price significantly. If a good is not liquid, for example a car (its value will only decrease over time), no additional estimated value is required. The collateral value of the collateral is so called collateral value.

The collateral value of property is the value of the property, which is calculated by lowering the market value by a bank discount. Bank discount refers to the amount of costs that a bank will incur as a result of borrowing, as well as the amount of funds available for the provision of financial services.

In order to be able to assess the property by an expert, it will be necessary to provide a certain package of documents:

  • technical passport for land or premises;
  • license, passport and EPR code of the lender if the bank orders the service;
  • passport and TIN if borrower orders service;
  • regional deed of transfer of land, in case of assessment of share;

The objective of the appraiser who performs this examination is to determine the market price, on the basis of which the bank can set the maximum threshold for the provision of funds to the borrower. The appraiser determines not only the market value of a particular item, but also the change in its value, depending on the level of liquidity. Liquidity depends on how quickly assets can be sold to maximize cash flow.

How do you sell valuation property?

Sale of valuation property is its realization to third parties at market value. Property can be sold in several ways:

  1. Make a normal sale by announcing the sale and setting its value relative to the market.
  2. Court-ordered sales.
  3. Open auction.

The most advantageous way is to make a normal sale. This method can be prolonged over time, however, at the exit you can get good sums of money that will satisfy the bank and part of its balance will pass to the borrower. Public tenders and public auctions offer very low prices, but if there is an urgent need to sell the property, this method is used. The subjects of sale are the bank and the bidder. To become a participant it is enough to register before the auction. The contract shall state the subject of the pledge and its estimated value, as well as the amount and duration of the loan obligation.