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Collateral is an asset that is used by a borrower as a security for a loan. The asset is pledged to a lender where the lender can sell the asset to recover the value of the loan in case the borrower defaults payment. These assets under collateral remain as properties of the borrower. A lien is placed on these assets which allows the lender to have control on the assets (and sell them) when borrower defaults payments as stipulated in the loan agreement. A way lender can recover the remaining loan amount.
A collateral offers a lender more security by allowing them to recoup any loss they may incur from payment default. Because of this, a loan that is supported by a collateral is offered with a much lower interest rate than an unsecured type of loan.
A collateral may be broken down into different types depending on the loan. It can be pre-determined by the lender based on the loan that is being secured such as real asset on a mortgage loan and the car being purchased on a car loan. There are instances where a collateral can be flexible especially when making a personal loan. A borrower must always note that for a loan to be secured by a collateral, the value of the collateral must be equal to or exceed the value of the loan. On the other hand, an asset that depreciates placed on collateral should have a year on year value of equivalent to or more than the loan value.
Another reason loans secured with a collateral creates less risk to a lender is that it pushes the borrower to pay the loan to avoid losing the asset. This is especially true with real assets that have been placed on collateral as most real assets appreciate rather than depreciate. The same motivations arise from an equipment as collateral as long as the value of the asset exceeds the value of the loan.
Lenders often prefer to grant a secured loan as these types of loan prove to be less risky for losses. If losses do arise, it is minimized by recouping through the collaterals that has been placed.
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.
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.
An 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.
Many cardholders often take on owning a credit card without really considering the responsibilities that go with it. Credit cards are very effective means of convenience and security for a cardholder. The downside is when a cardholder forgets the responsibility of owning a credit card.
We must always remember that a credit card is a pre-approved debt that is granted by the issuer to its cardholder. This allows the cardholder to make purchases with different merchants, supported by a cardholder’s promise to its issuer that they will pay at a future date. With this agreement, an issuer allows the cardholder to purchase at a certain limit. This limit is based on the issuer’s evaluation of the cardholder’s capacity to pay and credit standing.
Often, an issuer grants a credit limit to its cardholder which is a bit high. This is where responsibility in managing the credit limit is important. As much as possible, request your credit card issuer to put a credit limit that is around 80% of your monthly income. This will allow you to have the capacity to liquidate the entire debt if you need to. A credit limit beyond your income is not bad at all as long as you know how to manage your debt properly. An example would be setting rules with regard to your card usage and debt you allow to be charged to your credit limit.
There is a certain amount of debt you have to maintain with your credit card which is compared to your credit limit. This is called your debt-to-limit ratio. This debt-to-limit ration is very important to credit companies and are actually being used to evaluate the cardholder’s credit standing. An ideal debt-to limit ratio is 30%. This means that if you have a credit limit of $10,000.00, try maintaining your expenditures within the $3,000.00 range. This allows the cardholder to raise your credit scoring and gives the creditors an idea of you being able to manage your finances. This will grant you a low risk score for creditors.
Properly managing and maintaining a reasonable debt-to-limit ratio allows you to manage your finances better.
We all know that credit cards are starting to become one of the necessities that needs to be inside our wallet. It has become the basic part of consumer life that it has defined what convenience is when it comes to purchasing and payments. But BDO credit cards are still personal loans. Being a loan, there is still a need for us to be responsible for the use of credit cards. Proper use and loan management must be taken to avoid getting deep into debt. Any charges applied to a credit card can grow out of hand if we are not responsible enough on handling it. Here are a few things to keep in mind when you plan to get a credit card.
- Make sure you have a STEADY source of income
Although this is an obvious requirement, some people do apply even without a source of income. Credit card issuers do a check on requirements before they grant a card holder the right to use and access credit from them. They are not very particular on the proof of income. It can be a bank, a tax return or even business documents to support a proof that there is income which you may get payment from. We often miss the fact that our income should be steady and stable enough to provide us a source to pay our credit.
- You are educated about financial charges, interest rates and other topics regarding loans
Always remember that the best way to avoid having a problem is knowing how the problem can arise. In cases of debt, you should know and understand how your debt can grow through finance charges and interest rates. How penalties arise and applied to your debt. Knowing these aspects will help you avoid the pitfall of being buried under debt.
- You are disciplined
This final requirement is a very important key before owning a credit card. A credit card is there for convenience and not as a replacement for money that you do not currently have. When you use your credit card, make sure that your purchase is something you can pay with cash if you didn’t have your credit card around.
A debt may be classified by a licensed money lender under two categories which are “Recourse Debt” and “Non-Recourse Debt”. It is essential for a borrower to understand these categories to ensure the scope in which the lending company has on collecting the debt owed.
Missing to understand the information regarding these categories often put the debtor under more exposure when unexpected circumstances occur.
As planning is important prior to taking a loan, understanding these categories will help the debtor secure the income and assets required for backing up the flexible loan.
- Recourse Loan
A recourse loan is a type of debt where a lender has the capacity to seek recovering the financial damages from the borrower in cases of default.
In cases where the recourse debt is secured with a collateral, the lender will have the capacity to collect any deficiency from the proceeds of the secured asset. The lender can go after other assets owned by the borrower to pay for the deficiency.
- Non-Recourse Loan
Non-Recourse Loan on the other hand is a type of loan that limits the collectability of the lender if debtor defaults in paying the assets. A loan that is secured with a collateral does not necessarily mean that it is a recourse loan. There may be instances where a non-recourse loan can be a secured loan. The problem disadvantage of a non-recourse loan to a lender is that their collectability on default is limited to the value of the asset that has been placed collateral. Oftentimes on these types of personal loan singapore, the lender requires a collateral that either appreciates in value or depreciation is slower compared to other assets.
The protection that a borrower has depends on the category of loan in which the lender grants a borrower. This is specifically mentioned in the fast cash loan agreement to be clear on how the lender can protect itself from the debtor’s default. The only protection a lender has on a non-recourse loan is the value of the collateral to be used in recovering the losses. This is why a lender carefully reviews the risk and value of the collateral when granting a non-recourse type of debt.