Collateral is a commitment to pay backed by real or tangible assets such as a house, land, or car, for example.
The real guarantee constitutes the delivery of a tangible asset in order to guarantee the fulfillment of a payment or obligation. It is used mainly in bank loans and the assets that are left as collateral are usually houses, buildings or land.
Purpose of the collateral
It is used to provide security in the fulfillment of a payment or commitment. It is usually used by a debtor who wants to convey assurance to his creditor that he will pay the credit granted. Once the obligation is fulfilled, the property of the property left as collateral is restored to the debtor.
Conditions for an asset to be a collateral
The minimum conditions for a good to be accepted as collateral:
- Whoever offers it must have ownership over it
- The property must be free of charges and encumbrances
Types of collateral
There are mainly two types:
- Mortgage: when real estate is offered as collateral. To determine the value of this asset, an appraisal is made. In general, when the property is a home, it is considered that 80% of its value can be collateral. If it is a land on the other hand, the guarantee is 50% of the value.
- Pledge guarantee: The goods pledged are different from the real estate. It can be jewelry, cars, etc. The conditions are determined by the agreement between the parties (debtor-creditor)
Other examples are: merchandise, savings accounts, mutual funds, etc.