How is loan repayment collateral carried out?

By lending money to a borrower, the bank makes money on it. However, in addition to income, the financial institution is also concerned about the repayment of borrowed funds, because if this does not happen, then it will not be possible to talk about any profit. To make the lending process safer for themselves, banks invented a whole system of checks of the borrower, and also began to require additional guarantees from applicants for their reliability.

Why is a preliminary assessment of the applicant conducted?

The bank is concerned about the return of funds even before it issues them. Hence the lengthy procedure for reviewing the application, and the need for a whole pile of papers. Moreover, the larger the loan amount, the more thorough the bank will be. Of course, only the person who earns something can repay the loan. That is why the main issue of the lender will concern the income of the applicant. An individual’s income certificate is considered the best indicator of their ability to pay. If the borrower cannot provide it, then the loan terms will be quite strict for them. In addition, it will be difficult for him to get such large loans as a mortgage or car loan.

Since 2005, banks have had another measure of borrower reliability-their credit history. This concept hides a set of information about all loans that were previously issued by a specific person. The borrower’s file shows what amounts were lent to him, at what percentage, and most importantly-how diligently the debtor fulfilled its obligations. Knowing the borrower’s credit history, as well as their financial present, the bank can determine how much money can be lent to a person and whether it is worth it at all.

Guarantees payment of the loan

A very important factor affecting the security for the repayment of the loan is the involvement of guarantors. The persons that the bank wants to see in this capacity must have income corresponding to the loan amount, as well as a positive credit reputation. The responsibility of guarantors is prescribed in such a way that they begin to pay the loan immediately, as soon as the borrower has a long delay. Sometimes a guarantor can risk not only losing their money but also losing their property if they find that they are also unable to repay the loan. After closing the loan, the guarantor can force the borrower to compensate for losses in court, but in reality, this happens very rarely, so being a guarantor is a risky and thankless business.

Often, a pledge is used as security for repayment. For this role, the property purchased on credit is usually selected. However, such bank reinsurance is fraught with additional costs for the borrower, since he will have to pay for the assessment of the collateral and its insurance. In addition, banks are very demanding about the property that will provide the loan. The only way out may be to provide the borrower with other, more valuable property.

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