Loan security – how does it work?

Each financial entity providing funds to its client – whether in the form of a loan or credit – hedges against the risk of debt default. The type of collateral used depends on the borrower’s financial position and the estimated financial risk involved in borrowing.

Types of loan collateral

Types of loan collateral

The standard collateral for the loan, which is used by almost every non-banking institution, is verification of the borrower’s creditworthiness and financial credibility. Well-known procedures here are checking databases such as the Credit Information Bureau or the Economic Information Bureau. Other forms of security include verification of the source of income and its amount. In addition to them, parabanks can use additional tools. These are used when granting funds to the borrower involves a higher risk of default. These include bail, pledge, execution, promissory note, insurance and mortgage.

Securing the loan by a surety

Securing the loan by a surety

We speak about a surety when a third party undertakes to take over the repayment of debts when the original borrower is unable to do so. The surety can be in written or oral form. Most often it requires verification of the creditworthiness of the guarantor.

Pledged loans

A pledge is a known form of collateral for borrowed funds. It can be movable, immovable and property rights. Here it is worth paying attention to two types of lien that can be used. The first is an ordinary pledge, which obliges the debtor to transfer the subject of the pledge to the creditor. The second is a registered pledge, which is more favorable for the debtor. The subject of the pledge is entered in the pledge register, the debtor himself can use it, and thus derive financial benefits from it.

Execution as collateral for a loan

Execution as collateral for a loan

He submits to enforcement by signing a notarial deed. Under it, an insolvent borrower voluntarily submits to the recovery of claims. In practice, this means that the lender who becomes a creditor does not need to start legal proceedings to assert his claims.

Loan security bill

Loan security bill

A promissory note is a type of security. With its help, private loans are usually secured. It is an alternative to civil law contracts, and therefore constitutes proof of the conclusion of the contract. A characteristic feature of the promissory note is that it can be traded – it can still be resold during the life of the loan.

Mortgage

The mortgage loan collateral applies to real estate pledge. However, it can only be used for loans. Since 2017, mortgage law has banned this form of collateral from lending institutions.

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