Collateral and consumer credit – how is it different?

Collateral and consumer credit are financial instruments with similar objectives. Both loans are granted to the client for a certain period of time in order to repay, with full payment of the body of the loan and interest on it, in accordance with the concluded contract, for violation of which the bank imposes a penalty on the borrower. However, there is a very big difference between them.

What is a mortgage?

In lending, a consumer mortgage is a financial asset that becomes proprietary to a lender if the borrower fails to perform his contractual obligations.

Under a credit agreement, if no repayment of the body of credit and its interest is made, the creditor has the full right to take ownership of the property through the court and to dispose of it at its discretion. If the creditor sells the property, the borrower is completely exempted from paying the money. In the case of a change of ownership, the banking institution or creditor may retain the asset as it has taken possession, or may sell it, receive money for it and meet the costs of conversion and legal costs. The financial value of the property or other assets should be such that it can fully cover the amount of the loan as well as the rest of the costs paid by the borrower.

Collateral loans are the maximum security and guarantee that the lender can get.

Advantages of a secured loan

A secured loan is the most profitable form of lending for a bank. No matter what amount the bank lends, it will always take more for itself, since the bank will, on the one hand, cover all its costs, and on the other, provide itself with a profit for providing the service. The advantage of a secured loan for a bank is full coverage of all its expenses, and the advantages for the borrower are much greater.

The borrower can receive a large amount of money at once without collecting a large number of documents and reviewing the credit history. Since the bank fully insures itself against possible non-payment, it does not need to be insured with anything else, so it issues loans almost immediately, either in the form of a credit card or in cash. The amount of property is estimated by the commission based on the market value.

A secured loan provides for a longer term, so the interest rate is much lower, which reduces the financial burden on the borrower in each month. The interest rate can be reduced by 4-5%, and in accordance with the fact that the borrower takes amounts of thousands of hryvnias-this is a very significant saving.

In a secured loan, the bank almost always provides a loan of funds, as it is profitable for it. The request will not be processed for a long time, the client brings the documents, draws up a contract and issues money.

How do I apply for a secured loan?

Each party to a financial agreement has its own rights and obligations, but the procedure for entering into an agreement is the same for everyone. The contract must contain three mandatory clauses:

  • type of collateral that can be used for movable and immovable property;
  • estimated value of the collateral item;
  • the amount of the official obligation.

If at least one of the points is omitted, the agreement is considered invalid. The subject of the contract can be both existing objects, and future purchases of purchase and sale or leasing. The contract is concluded only in written form, certified by a notary, no oral agreements or receipts can have legal force. The borrower must be a citizen of Ukraine or have a temporary residence permit and, in case of conclusion of the contract, transfer the following documents to the banking institution:

  • passport;
  • TIN;
  • loan application;
  • marriage certificate (if any);
  • property documents.

What is a consumer loan?

Consumer loans are often referred to as unsecured loans. An unsecured loan is an ordinary loan of funds from a bank for a certain period of time at a certain percentage, without making collateral. Such a loan can only be issued to individuals. A consumer loan can be issued for a specific purpose when a certain amount of money is not enough. Usually, consumers are paid a small amount of money for the purchase of equipment, travel or current expenses. This loan is given for a short term, usually up to 3 years, at an average interest rate. Often this type of loan is paid in installments for a certain period of time. The loan is paid in cash or provided in the form of limited bank cards. Consumer loans are often issued in microloan institutions.

Collateral and unsecured loans differ in that in the first case, the loan is secured by any collateral property owned by the borrower and transferred to the bank’s ownership in case of non-payment. An unsecured loan does not offer the bank any guarantees in the form of collateral, so the process of obtaining this loan is a little more complicated than the first type.

Collateral and consumer credit – how is it different?

Benefits of consumer credit

A consumer loan is usually taken for a specific purpose for a specific product or service. That is, the client knows the amount in advance and borrows it from the bank, for example, to pay for a child’s education, buy equipment, perform repairs, buy a trip, and much more.

The advantages of getting a consumer loan are as follows:

  • the procedure for obtaining a loan takes several days, if the amount is small, the loan can be issued immediately;
  • all spent funds are used at their own request, or are directed to a specific purpose;
  • the borrower is provided with minimal requirements, such as a good credit history, or having a deposit in the same bank where the borrower wants to take out loans. A good addition is a personal income statement.
  • insurance is issued on request.

How do I apply for a consumer loan?

Now the procedure for obtaining a consumer loan is very simplified. To receive money, you can send a request to the official website of many banks and wait for confirmation. So, to do this, follow these steps:

  1. Fill out the application form provided by the bank. You can find the application form on the main page of the site.
  2. Wait for a response from the bank. If the application is approved, you will receive a notification on your mobile phone.
  3. Go to the nearest bank branch to get a loan, or use the mobile version to transfer money online to a credit card, if it is linked to the app.

To make a proper application, you must enter your personal data, agree to the terms of the application, and submit the application. To fill in the form, you need to enter:

  • TIN;
  • mobile phone number;
  • type of activity;
  • email address.

What is the difference between a mortgage loan and a consumer loan?

What is the difference between a cash loan and a consumer loan, in other words, what is the difference between a collateral loan and a consumer loan? Both types of credit are aimed at borrowing a certain amount of money for the purpose of using the consumer. But these two forms are radically different from each other.

A secured loan provides a guarantee to the bank — a pledge in the form of property, which, in case of default, becomes the property of the lender. Therefore, the amount that the borrower can take can reach up to several million. A consumer loan provides a much smaller amount for use, since the bank does not take any guarantee for the repayment of the loan. They can only check the client’s ability to pay, their income, study their credit history, and approve the payment.

Repayment of the consumer loan must be clearly defined in the prescribed period, in case of non-fulfillment of its obligations, the bank can change the loan percentage, or sell the debt obligations to third parties. Interest on a borrowed loan is significantly lower than on a consumer loan due to the longer loan term and larger loan amount. If the borrower does not want to pay the loan, he transfers the property to the bank and is completely exempt from all payments.