What is the pledging of credits?

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Pledge of credits

The lender is more willing to make a concessional loan if it is secured by a commitment. Often the collateral is owned by the borrower. For a creditor, a pledge is a guarantee that the organization will not incur losses if the customer does not pay the debt. For the borrower, it is a motivation to pay the loan and the interest pledged in full so as not to lose the object of the guarantee.

What is the pledging of credits?

What is pawning? The definition of commitment is a certain valuable property, the rights of which are transferred to the bank / creditor while the borrower uses the money from the financial institution. When issuing a pledged credit , a customer signs a contract with a financial institution, according to which ownership of the property will be pledged to the original owner after he returns the borrowed funds. This means that if a borrower uses a home or car as collateral, they will continue to drive this car or live in a home, but will not have the right to sell or donate this property.

If the person does not pay the debt, the bank can collect the promised property and then sell it at auction and put the proceeds to pay the customer's debt.

When a borrower writes out a mortgage, the department he buys becomes a guarantee. At the same time, the borrower can settle and register in a new home, make repairs there, and even rent an apartment. But in the event of a default on the pledged loan, the bank will sell the property at auction.

How does the pledging of credits work?

The credit conditions to pledge are guaranteed by the home and real estate means that this guarantee can be easily sold. This means that an apartment in a new building in a busy district of the city is a more liquid security than a house in the regional center. When assessing the liquidity of real estate, bank employees answer the main question: how quickly can they sell real estate with the maximum profit and pledge the money of the commitment to the organization.

Another important condition is the easy transfer of ownership of the loan commitment. For example, if a minor is among the owners of the mortgaged property, there may be problems with the disposal of said apartment. Therefore, banks may sometimes not accept a particular property as collateral to avoid problems in the future.

Compromise of credit peculiarities

In the process of applying for a loan, a special contract is signed, according to which the borrower provides the lender with a pledge in the form of property. The contract reflects parameters such as cost, location, property transfer time, and more. In this case, the lender has the right to sell the collateral if the loan was not paid or was not fully implemented. In addition, the repayment includes not only the amount of the loan, but also the interest for its use, as well as other penalties and fees, if the loan agreement stipulates it.

The most common forms of guarantee are:

  • The property;
  • Car;
  • The values;
  • Precious metals.

The security deposit can be provided in two ways:

  1. Physically collateral remains with the borrower;
  2. The collateral is transferred to the lender until the borrower meets all of the loan obligations.

How to pledge money?

The process of obtaining a loan secured by the property is no different from the normal processing of a loan. However, before signing the loan agreement with the bank, several operations must be carried out. First, you must evaluate the property and assess its liquidity. Special people evaluate the cost of an apartment or house. The bank can recommend specialists they trust. In this case, the cost of valuing the property will fall on the client.

Insured real property must be insured. The insurance costs will also fall on the client. Banks often insist that a home or apartment must be insured for various risks.

Who benefits from the pledging of credits?

A commitment can facilitate access to finance for both a private client and a business and is a useful way to offer real payment guarantees to potential lenders. For example, if the amount of income or the guarantor of the borrower does not meet all the desired requirements requested by the bank, they can use as collateral that commercial space that they do not use, or that investment fund that does not need immediate liquidity Therefore, people offer another payment guarantee, which can help them obtain the desired pledge loan or improve their terms.

On the other hand, the cost of using collateral as a method of guaranteeing payment is often less than the cost of a mortgage. When a house is mortgaged, there are a number of bureaucratic costs, such as the tax on documented legal acts (AJD) or the evaluation of the house itself.

The main advantages of pledging credits

  • Reduced interest rate: a high interest on the loan is due to the fact that the financial institution is trying to hedge its possible risks. If the loan is secured (pledged credit), there are significantly less risks and the interest rate is lower.
  • Long maturity: Since the lender does not risk much, the borrower can determine the maturity independently.
  • A large amount: In most cases, the loan amount to pledge depends on the value and liquidity of the collateral.
  • A flexible approach: a person without a source of income or with a small salary can obtain a secured loan.

Among the disadvantages of this type of loan are:

  • Collateral insurance - a standard requirement in the event of destruction of real property in the event of fire, destruction, or other insurmountable circumstances;
  • Restrictions of use: until the repayment of the loan to pledge, the real estate cannot be donated, sold or exchanged without the consent of the creditor;
  • A large package of documents - To get a loan, you will need to collect all the title and technical documentation.
  • In addition, there is always the risk of losing real estate in the event of unexpected financial difficulties and the inability to continue repaying the loan. However, this nuance largely depends on the terms of the contract and the internal policy of the creditor company.

about the author

Maria Solis Burley

Credit consultant in Spain. Financial Analyst at Crédito Victoria.
LAST UPDATED: February 5, 2020