Thursday, December 20, 2012

What Is a Loan Collateral

What Is a Loan Collateral?

A Loan collateral may be anything that represents value. Collateral is a security pledged just in case a loan may not be satisfied or become past-due. This may be of any value acceptable to the lender, and can include real estate, vehicles, Jewelry, Stocks and Bonds, and even shares in a club Membership.

A collateral greatly increases your chances of approval

If you want to use a real estate lot you own as collateral for your loan, you should prepare a currently paid Real Estate Tax Receipt - so the lender knows there is no tax obligation on your property when they foreclose it to pay for your unpaid amortizations. With this, a tax declaration certificate (LTC) and the transfer of title (TCT) in your name will show the lender that you are legally the owner of the property and that the value has been assessed well; that will determine your loan value or the coverage of the loan granted you.

If you opt to use your car as loan collateral, the lender needs to authenticate the Official Receipt (OR) showing you have registered and paid for the taxes due the purchase of the vehicle, and the Certificate of Registration (CR) to prove you have the legal right to transfer the value of the vehicle in case the lender foreclose on it to pay for your amortization.

For Jewelry to be considered loan collateral, some banks and microfinance companies can ask for your Affidavit of Ownership free from Liens and other claims, with a contract rider to assign the value via a Deed of Sale or a Dacion En Pago agreement. A Dacion En Pago Agreement is a contract that stipulates you are transferring or selling the value of the Jewelry to pay for your loan in case you fail to pay your obligation.

The loan collateral is a form of security your loan in case you are unable to meet the payment. It gives the lender a contingency to collect on the principal and penalties when the situation becomes very hard for you to repay your loan. As such, the risk of the lender becomes smaller and hence, most of the time, improves the interest they agree to impose on the loan.

If you have collateral for your loan, the risk of defaulting is decreased since there is an alternative form of payment, or a guarantee that you can exchange something of similar value. Hence, it would be easier for the lender to decide to grant your applied loan.

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