Loan collateral required by banks.
Banks, apart from being institutions of public trust (i.e. they are obliged to keep confidential data concerning clients and their operations), also constitute a specific form of enterprise. Their goal is (as in the case of any other company) to maximize profits and achieve the best economic situation. In the case of banks, however, the most important thing seems to be to ensure the stability and security of their operations, which is why they attach great importance to creating an appropriate policy of securing a loan.
Why does the bank need a loan security?
The most important thing for the lending bank is to recover the entire amount of the liability, including accrued interest and commissions after the time specified in the contract. Therefore, each of the financial institutions is looking for a way to minimize the so-called credit risk. For this purpose, detailed assessments of the creditworthiness of customers, both individual and corporate, are carried out. On this basis, the credit risk associated with a specific transaction is estimated. If it turns out to be too high, the bank may require its client to provide additional security for the loan.
It is a guarantee for the bank that in the event of financial difficulties the client will recover all or at least part of the funds involved in a given transaction. In economic practice, very different types of credit collateral have been developed, which can be divided due to various criteria. The most common classification lists personal and material security.
Personal loan collateral
One type of legal security that a bank may require from its client is personal security. They are characterized by - as the name suggests - the personal responsibility of the person providing the security (borrower or other debtor). It should ensure the recovery of the entire credit amount, including accrued interest and commissions.
If the bank demands a personal security from the borrower, it means that he is liable to the financial institution with all his assets - both those he has at the time of taking the loan, and those he will only acquire. It is a type of collateral that is specifically required of start-ups that do not have satisfactory creditworthiness.
The following can be mentioned among personal security measures:
- blank promissory note - containing the promissory note issuer's commitment to pay, along with its signature,
- promissory note guarantee (aval) - i.e. a third party's obligation to pay all or part of the promissory note sum,
- surety granted on the basis of the regulations contained in the Civil Code - the guarantor undertakes to repay the granted loan in a situation where the borrower fails to fulfill this obligation, within a strictly specified period,
- bank guarantees - the bank undertakes to pay the lender a sum of money in the amount of the remaining installments together with interest, commissions and other costs of the proceedings,
- assignment of claims - in this case, the borrower transfers to the bank the right to receive specific debts of the debtor,
- power of attorney - authorization of the bank to manage the borrower's bank account,
- accession to a credit debt - under such an agreement, a third party who is a joint and several debtor joins the existing debt.
Tangible security for the loan
The bank may demand from the borrower, in addition to the personal security, also one of the tangible securities. In their case, the liability of the person providing the security is limited to individual components of its property. It may concern not only a specific part of the borrower's goods, but also third party goods, including real estate, movable property and various types of rights.
The most frequently used collateral in kind are:
- general pledge - a given movable property may be encumbered with the right under which the creditor may pursue satisfaction of his claims from this thing, but it does not matter whose property it becomes,
- mortgage - as in the case of a general lien, however, the mortgage applies only to real estate; it is necessary to create a notarial deed with an entry in the land and mortgage register,
- deposit - under which the borrower provides the bank with security in the form of bearer securities or a specified sum of money to secure claims in the event of failure to comply with the contract),
- blocking funds on the bank account - made at the request of the borrower, until he meets certain obligations towards the creditor),
- collateral misappropriation - the borrower transfers the ownership of his property (a movable item, such as machinery, inventory, jewelery) to the creditor.