April, 2017

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What is a Collateral Security?

How a salary loan is set up may often be confusing that is why careful planning and studying of its terms is very important. A medium term or long term loan often fall under a secured type of debt. A secured type of debt which the lender grants requires the debtor a certain collateral to back up the debt in case there is default on the debtor’s capacity to pay. There are types of collateral which we may refer to as primary and secondary collateral that backs up a secured type of debt.

A primary collateral is usually the property or goods that the borrower has purchased with the amount that has been loaned. But with this, it is often out of the lender’s control on what the goods the borrower will buy unless the loan is specifically granted for such goods (ie. Car loan). Another factor is value of the goods may depreciate or market value of the property may fall below the initial value which the loan was granted for. These factors may cause insufficient value of the collateral to support the total amount of the loan.Image result for property collateral

With the cases above, solution a lender may impose is called a secondary collateral or “Collateral Security”. This collateral is an additional asset that a lender puts a lien on so that they can claim additional damages to support the difference or losses incurred even after the primary security has been sold.

Related imageAn example of a type of metrobank direct loan that often requires a collateral security is a car loan. Everyone knows that one of the fastest product that loses its market value is buying a car. Because the depreciation rate of a car is high, it’s value as a second hand car is often way below than remaining loan amount. This is the reason why a lender may require a collateral security that will supplement the price difference that is present between the market value of the car and the remaining loan balance. This may also be a protection for the borrower to get high value assets such as properties being sold just to fill the balance.