Collateral

Collateral is the security of a loan or other liabilities, which its owner waives if he cannot fulfill the commitments made in the loan agreement or is only late. Collateral can be almost anything that the other party accepts: real estate, chattels, goods, securities.

When credit we hire, the bank a during credit evaluation seeks to reduce the risk that we may not be able to repay on time or at all capital and interest rates. One way to do this is by asking us for collateral, which falls on you if we can't repay. If we can offer good collateral, it naturally improves our creditworthiness, and thus the charged interest may even decrease. 

Collateral is therefore a valuable item that can be taken from the borrower to the credit provider in the event that the latter is unable to repay the loan according to the previously established conditions. A good example of this is mortgage loan. In such cases, the bank marks the property itself (or another property owned by the borrower) a financing as collateral for the purchase of which you want to take out the loan. 

If we pledge something as collateral and cannot pay, the bank acquires the given asset in order to sell it and recover the original loan amount from the money received for it. The coverage guarantee that the creditor does not lose his money, even if the borrower does not repay the loan according to the terms of the contract.

Collateral can be anything that the creditor accepts, but most often real estate, goods, cars, machines, securities, depending on what the borrower can offer. It is important that what the borrower offers as collateral can no longer be disposed of without the creditor permission.

In the case of business organizations, it happens that the borrower allocates a specific amount on his account, and his bank issues a collateral certificate for the other creditor bank . For the creditor bank, this is considered a pretty strong guarantee, since it gets access to its money at any time when the borrower does not pay. We can ask why we would take out a loan if we have money at the other bank: well, with this solution, we usually provide collateral with our deposit tied up somewhere, and it is mainly used to remedy temporary insolvency . 

For investment loans it often happens that the collateral for the loan is (also) the asset that we want to buy from the loan. The same is the case with car loans: at this point it is worth looking around the market to see if the same asset or car is available with leasing, which provides even more favorable conditions, but a similar construction.