Loan collateral

What is loan collateral and why is it needed?

Let's start with a clarification: collateral is not a mandatory requirement for getting a loan. Unless we are talking about a mortgage. For a bank, collateral is a guarantee of repayment, that the client will settle their debt with a high probability. If not, the lender will get their money back anyway by realizing the collateral or recovering funds from the guarantor.

How does a secured loan differ from a regular one?

For a bank, the difference between a secured loan and a regular loan is obvious — the organization receives a guarantee that the debt will be repaid. But are there differences for borrowers? For convenience, we have provided a comparison table of a secured loan and a regular loan.

Secured loan	Regular loan
Loan amount. In this case, it will certainly be larger. By providing, for example, your property as collateral, you can get up to 30 million RUB in credit.	Without collateral, you can count on no more than 5-7 million RUB.
Loan term. Since the bank is confident that you will return the money you received in any case, it is ready to issue a loan for a term of up to 30 years.	If the lender has no guarantee that the debt will be repaid, they are interested in quick loan repayment. Therefore, the maximum loan term will not exceed 5 years.
Interest rate. In the case of collateral, it will be lower. For example, if there is collateral or insurance, it can be 9-12% per annum, which is quite profitable in current conditions.	The interest rate on an unsecured loan can exceed 50% per annum.
Approval probability. Since the bank has a repayment guarantee, it is more likely to approve a loan to a person with not a very good credit history or low income.	In the absence of a guarantor, the bank pays attention even to the most insignificant details, and therefore you may be rejected due to a small overdue payment on a previous loan or due to insufficient work experience.

Types of collateral

There are several types of collateral: surety, property pledge, deposit, and bank insurance. Let's talk about each of them in more detail.

Suretyship

A guarantor is a person who takes responsibility for your loan in case you cannot fulfill your obligations to the lender for any reason. Virtually anyone who meets the bank's requirements can become one: a spouse, an adult child, a brother or sister, a parent, a colleague, a friend, or just a good acquaintance.

It is important that the guarantor meets the credit institution's conditions:

• be a citizen of the Russian Federation;
• have permanent registration in Russia;
• be over 18 years old (for some banks, over 21 years old);
• have a total work experience of at least one year;
• have a regular salary.

The guarantor bears the same responsibility to the lender as the main borrower. The principal debt, interest, fines, and penalties fall on them. If the guarantor also refuses to fulfill obligations, the credit institution can recover the money through court. The guarantor bears responsibility until the expiration of the loan agreement.

Collateral

More often, in retail lending, movable and immovable property acts as collateral—anything that can be realized to pay off the debt to the bank.

Basically, the collateral when obtaining a loan is:

1. Any residential property of the borrower. It can be: an apartment, a house, a room, etc.
2. Any non-residential property: a land plot, a dacha, a garage, etc. Let's make a reservation right away—banks extremely rarely accept this type of property as collateral.
3. Commercial real estate: an office, a warehouse, industrial and retail premises, etc. As a rule, this type of collateral is used when applying for a business development loan.
4. Vehicles: passenger cars, special equipment, trucks, trailers, buses, etc.

As a rule, the collateral remains the property of the borrower, but with restrictions specified in the loan agreement. Banks usually impose a restriction on the ability to sell the property until the loan is fully repaid.

Lending against a deposit

Obtaining a loan on such terms is possible if the borrower already has an open deposit for a decent amount in the bank where they are getting the loan. The credit institution sees that the client has enough funds to repay the debt in case of job loss or disability.

Bank insurance

Bank insurance is a guarantee that the insurer will fully or partially repay the debt to the credit institution upon the occurrence of an insured event.

There are two types of insurance when applying for a loan:

1. Borrower life and health insurance. Here, the insured event occurs upon the onset of the client's disability as a result of an accident, upon the death of the insured, etc.
2. Collateral insurance. In this case, the insurer will pay money in case of significant damage or loss of collateral as a result of a disaster, actions of a third party, etc.

Life and health insurance is voluntary. The bank cannot oblige the borrower to purchase an insurance policy. Nevertheless, the lack of insurance can be the reason for a loan refusal or a review of loan terms not in the client's favor.

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Pros and cons of secured loans

Let's start with the advantages:

1. Collateral makes it possible to get a much larger amount. Thus, without collateral, you can count on no more than 5 million RUB. With a guarantor or property collateral, the loan amount can grow up to 30 million RUB.
2. The same applies to the loan term. Without collateral, the maximum you can count on is 7 years. With collateral, it is 15 years.
3. The interest rate on loans with a guarantor or property collateral is significantly lower—it will differ from the Central Bank rate by only a few points. While the cost of an unsecured loan can reach 45% per annum.
4. As a rule, banks are loyal to borrowers of a secured loan. Since credit institutions have a debt repayment guarantee, they can approve a loan to clients with a low income or a bad credit history.

Now let's move on to the disadvantages:

1. If you take out a loan against property collateral, you will not be able to dispose of the real estate or vehicle until the debt is fully repaid. That is, you will be able to live in an apartment or house, drive a car, but you will not be able to sell them or issue a deed of gift for them.
2. Applying for a loan against property collateral or with a guarantor is slightly more difficult. You will need to collect slightly more certificates than in the case of an unsecured loan.
3. If you cannot fulfill your loan obligations, the responsibility to the bank will fall on the shoulders of the guarantor. Or the credit institution will sell your property through court to repay the debt.
4. In case it is difficult for you to fulfill obligations to the lender, you will most likely not be able to apply for refinancing with this or another credit institution.

Secured loans for legal entities

In the case of legal entities, loan collateral will be slightly different. Entrepreneurs and business owners can also provide banks with guarantors and property as collateral.

But more often, company assets, securities, equipment, etc. act as collateral. In a word, any liquid property of the organization can serve as collateral when lending to legal entities.

Let's summarize. If you need a small amount, it is best to take out a standard consumer loan. It will be much easier for you to confirm your income and employment than to collect all the necessary documents for a secured loan. To get a large amount (from 5 million RUB), you cannot do without property collateral or a guarantor. Even with the best credit history and high income, you will not be able to get a large unsecured loan.