The purpose of loan collateral, in any form, is to reduce the risk borne by the lender when granting the borrower’s loan. Formally, it is a security for the obligations that the client has incurred against the bank or any other financial institution. There are many types of credit collateral, but their common goal is to provide the bank – the lender with the reimbursement of loans and bank guarantees, including interest, commissions and other costs. Debt collection from collateral takes place when the debtor fails to settle the obligation on the agreed date. Securing the loan means that the lender may be willing to give a commitment with a more attractive margin or commission, or on other, preferential terms.
Forms of credit security
A bank loan may be secured using liquid or material forms of security. In terms of legal protection, the collateral is divided into personal and material. At the same time, personal security consists in the fact that next to the principal debtor another person will also be obliged to pay the debt, such as a guarantor. Tangible ways of securing the loan are to guarantee the lender the possibility of satisfying the claim of the creditor with a certain thing. The most commonly used loan collateral include:
• mortgage – debtor’s property being encumbered by making a mortgage entry for the bank in the land and mortgage register,
• pledge – on general terms – concerns movables,
• pledge on rights – including on securities,
• registered pledge – established on movable property belonging to the borrower,
• surety – obliges to repay the guarantor’s loan,
• a promissory note guarantee – obliges the guarantor on an equal footing with the issuer of the promissory note to repay the loan,
• blockade of bank accounts,
• deposit – the borrower provides the creditor with a security in the form of, for example, cash,
• bank guarantee – the bank’s obligation to pay the lender’s financial sum in the amount corresponding to the amount of unpaid loan installments,
• transfer of ownership as collateral – authorization of the lender to transfer ownership of property to cover claims for unpaid credit.