In order to reduce the interest rate on loans, it is reasonable to offer additional bank guarantees of repayment. In the language of credit specialists, such guarantees are called loan security. Let’s understand what kinds of loan lending software exist, how to take advantage of such an opportunity and how to act correctly during the conclusion of loans.
What is loan security?
Loan security is one of the principles of credit, which can significantly reduce the risks of the bank by attracting collateral or guarantors. In the event of a default on a loan, the debt will be repaid by the collateral or guarantor.
Since it is the risk of a client’s insolvency that determines the number of interest rates, the borrower can count on concessions from the bank and much more favorable loan terms in the presence of appropriate collateral. The most common ways of securing a loan are pledged property;
- payment of penalties;
- retention of property;
- bank guarantee;
- guarantee of other persons.
It should be noted that a loan can also be secured by means of money placed on some customer’s current account. In this case, it is necessary that the amount in the account was large enough to compensate for possible losses of the bank.
Forms and types of collateral
Collateral security is very popular with borrowers. With this type of return guarantee, the bank receives the right to seize the property that acts as collateral for the loan if the client fails to meet his obligations. It should be noted that the borrower must be in possession of collateral or have the appropriate permission from the owner. Different rights may also serve as collateral, which is especially important for legal entities. A collateral agreement necessarily contains the following information:
- description of the pledged property;
- the value of pledged property;
- the rights and obligations of each party regarding the pledged property;
- the procedure for using the pledged property until the expiry of the agreement.
Most often, the bank requires that the property offered as collateral is insured. It is important to remember that Canadian law allows replacing the collateral upon the consent of both parties to the loan agreement. After full repayment of the loan, the property is returned to the client.
The most common form of collateral is forfeit – a certain amount that is added to the total debt of the borrower in cases stipulated by the loan agreement. In practice, the penalty is applied to clients who are late with their loan payments. If the amount of the monetary penalty depends on the length of the delay, it is called a penalty. In other cases, the penalty is called a fine. It is important to remember that the client may dispute the amount and the fact of accrual of the penalty in court.
An extreme measure of compensation for the losses caused by the defaulter to the creditor bank is the retention of the borrower’s property. If the borrower fails to repay the debt in good faith, the bank may, either through the court or by agreement with the client, seize some of the debtor’s property and sell it at a public auction with the mediation of a bailiff.
Among the most reliable ways to secure a loan includes a bank guarantee. According to the law, such a guarantee can provide:
- by commercial banks;
- insurance companies;
- credit organizations.
The document confirming the security of the loan, as a rule, has the same duration as the loan agreement. Typically, this document details the cases in which the client can ask the guarantor to pay the balance of the debt.
Another common option for securing a loan is a surety bond. In this case, the guarantor assumes the obligation to monitor payments by the client.
Before signing a guarantee agreement, the bank carefully considers the potential guarantor’s solvency and defines the degree of his responsibility for the actions of the borrower. If any problems arise, the bank has the right to satisfy its demands by claiming both the client and the guarantor: the risks of securing a loan are distributed between them equally. After the loan agreement expires, the guarantor has the right to recover the costs incurred from the client in court.
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