If a person needs to take out a loan from a bank or other institutions, they can use various financial instruments. If the collateral is valuable property or real estate, then you should understand the entire lending process. In this article, we will explain what a secured loan is, and how you can use it to “improve” your financial situation.
What is a secured loan?
So, what does the term “secured loan” mean? In lending, this is an asset that the borrower transfers as collateral, as its protection, in case the lender does not fulfill its financial obligations.
Based on the loan agreement, in case of non-repayment of the loan body, as well as its interest, the lender has the right to take full possession of the asset and completely release the borrower from paying cash. When an asset passes into private ownership to a lender, the lender has the right to dispose of the asset at its discretion:
- leave it in the form of real estate, securities, or other assets.
- sell and get paid.
The financial value should be such that the lender, in the event of a sale, fully covers the loan amount that it provided to the borrower, interest for using the loan, and possibly other unpaid expenses. The rest of the amount can be returned to the borrower.
Security for the lender is the primary thing that it should receive, regardless of whether it is an individual or a legal entity. Security expressed in monetary terms — this is the collateral loan.
What are collateral loans?
Collateral can be any liquid assets that have the same value that the borrower borrowed. A pledge is not only a guarantee of timely repayment, but also security, in case of late payment and repayment of all costs of the lender.
Before deciding on a loan, it is evaluated. The procedure depends on the form in which the loan is transferred: movable or immovable property, depreciation costs, liquidity level, estimated and market value, and so on. There are a number of indicators that allow experts to perform a series of assessment actions to determine the value of a secured loan.
So, collateral loans come in the form of:
- Land plots. Land plots in the form of shares after evaluation may become the property of the lender. The assessment of the share is carried out taking into account the legal status that the borrower has for this land. In addition, the value of a share depends on the form of ownership and its intended purpose.
- Real estate. Market demand for the property is estimated, as well as rental demand.
- Assets of enterprises. Fixed assets are most often used as collateral in the balance sheet, since they have a sufficient amount to repay. The cost of fixed assets depends on the field of activity of the enterprise.
- Securities. Most often, shares, production contracts, and other types of securities of investors or private companies are provided as loans. Securities require the borrower to confirm them with cash or a letter of credit.
- Intangible assets. Trademarks, various patents and licenses, both for the object and for a certain activity, are used as collateral.
- Precious metals. They can be either in the form of investment coins, or in the form of bullion.
Whatever type of collateral loan the lender chooses, the object must be no less valuable than the outstanding loan body and interest on it. Often, an object that is purchased together with a loan is used as collateral, for example, a new car.
A secured car loan is not always promising, as assets such as a car are devalued almost immediately after purchase and are valued as secondary value loans. The lender has the right to insist that the assessment of the subject of collateral be independent.
Advantages of a secured loan
Collateral lending is the best solution for a bank loan, as the risks are minimized. No matter what amount the bank lends, it will always get back more. The bank will also cover all costs associated with a legal action if it is necessary to transfer ownership rights to itself. An advantage for the bank is a financial guarantee to cover all expenses and additional earnings. Let’s look at the advantages of a secured loan for the borrower.
- The borrower may receive a significant amount of cash. The amount depends on the estimated (book and market) value of the object. Basically, banks offer from 60 to 80% of the cost of the object.
- The interest rate on such loans is much lower than on other loans, especially if the loan is taken in cash, since the bank does not need to pay for its risks.
- There is a high probability that the bank will approve the loan. If in the case of other types of loans, the bank will take a long time to process your application and study your credit history and income level, then in the case of a collateral loan, the decision is made almost immediately.
What you need to get a secured loan
Each lender has its own financial requirements for obtaining a loan. However, there is a single procedure for entering into a secured loan agreement. It is regulated by two laws — the law on the pledge of real estate and the law on the pledge of movable property.
The essence of the laws is that in case of default by the borrower of the assumed obligation, the lender has the right to cover all its financial costs by collecting the pledged object.
The basis for the full transfer of the subject of a secured loan from the borrower to the lender arises only after the agreement is signed by two parties.
Three mandatory terms of agreements:
- Type of collateral — movable/immovable.
- The value of the collateral item.
- The amount of the official obligation.
If at least one clause is missing, 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.
If the lender is a banking organization, it may require the borrower to provide the following information:
- Proof of identity — documents proving the identity of the individual borrower.
- Proof of employment — an extract from the main place of work with the seal of the legal entity-enterprise.
- Proof of income — a certificate of income, both basic and additional.
A secured loan without proof of income can be issued to those who already have debt obligations to third parties, as well as those who have a bad credit history. In such a situation, a loan is issued secured by property, since the bank has a 100% guarantee-an apartment, in case of non-return of money. In case of non-payment of the debt amount, the bank has the right to sell the borrower’s real estate through the court.
Such a loan is issued even if you do not have your own apartment. In this case, the loan is issued to third parties.
The collateral object must meet the following requirements:
- The percentage of wear should not exceed 70%.
- The object cannot be in an emergency state.
- Materials made of wood or timber are not suitable as collateral. Wooden floors are also not allowed.
- The item is not in the queue for major repairs.
- The item has at least three floors.