The term “collateral” means any asset or property that a consumer promises to a lender as a safeguard in exchange for a loan. In general, collateral loan agreements allow the lender to take back the asset if the borrowers do not repay the debt in accordance with the contract. If you are considering a loan secured by a personal asset, it is important to understand how the guarantee works.
Definition of the guarantee
You can have a guarantee that the bank can take if you do not pay your debt or loan. This can be any element of value accepted as another form of repayment in case of default. If the loan payments are not made, the assets can be seized and sold by the banks. This ensures that a lender receives full or partial compensation for any outstanding balance on an outstanding debt. Secured collateral loans are called “secured loans” and are often required for most consumer loans.
What is a guarantee?
- Value object pledged by a borrower to secure a loan
- Backup for loan repayment that adds security for a lender
- Assets that a bank can seize and sell if a borrower misses its commitments
Most financial assets that can be seized and sold for cash are considered acceptable collateral, although each type of loan has different requirements. For a mortgage or auto standard, the house or the car itself serves as collateral. With high value personal loans, valuable assets such as jewelry or paintings are also accepted. When businesses and small businesses apply for a loan, they often provide collateral for equipment or other physical assets.
For borrowers with poor credit, pledging collateral can improve the chances of obtaining loan approval. The guarantee reflects the consumer’s commitment to repay the loan and reduces the risk of loss for the lender. Guaranteed loans also tend to have lower interest rates, saving thousands of euros in the long run. However, other factors such as credit score, income, and job stability will also affect the chances of your loan approval and your interest rate.
Examples of secured loans
Warranty requirements are a common feature of loans for individuals and businesses. We have introduced some consumer loan products to present the most popular examples of collateral.
Consumers use personal loans to consolidate their debts, expand their loans or finance their current expenses. These loans are offered by lenders under two main types: secured and unsecured. Guaranteed personal loans are covered by a guarantee, while unsecured loans are not. Since guarantees reduce the lender’s exposure to default risk, secured personal loans have lower interest rates than their unsecured counterparties. In addition to physical assets such as houses or vehicles, monetary assets such as investments, savings or future paychecks can also be used as collateral for a personal loan.
Small business loans
Small business loans are a popular way to support a growing business and can be used to finance hires, offices or equipment. Guarantees for these loans may include real estate, future payments by customers and inventory. Small business owners may also use their personal assets to obtain loan approval, especially when running a business outside their home. In some cases, lenders require a “personal guarantee” from small business owners – a written promise that the borrower’s personal assets can be seized if the business is in default.
Mortgages and auto loans
Mortgages and auto loans are the most common types of secured loans used by consumers. As mentioned previously, the purchased asset (ie the house or the car) serves as collateral for these loans. Most lenders require that assets be valued to determine the appropriate value of the collateral. This process is particularly important for mortgage applicants because lenders only approve a home loan if the appraised value of the home meets or exceeds the sale price.