Why do banks usually require collateral when granting loans?

The main source of loan repayment is funds generated by the business activity carried out by the borrower, which according to the bank’s assessment has creditworthiness. However, the conducted credit analysis, mainly based on historical financial data, has some risk.

Therefore, when granting loans, banks, out of concern for the interest of depositaries and shareholders, take various actions to minimize the likelihood of default.

The basic way is to accept collateral

The basic way is to accept collateral

That is used only in emergency situations, undesirable from the point of view of both the bank and the borrower. Just like a tightrope walker in the circus, he assumes that he will walk safely over a high suspended rope and that no net will be needed, which was just “just in case”.

The loan collateral is to ensure repayment of the loan granted together with interest, commissions and other costs incurred by the bank only when the borrower loses his creditworthiness and fails to settle these payments within the set deadlines. The psychological aspect is not without significance.

The specter of losing valuable collateral may additionally motivate the borrower to repay the loan. In turn, the bank, seeing the readiness of the company’s owners to guarantee the repayment of the loan, confirms the belief that they are fully involved in the success of the project to be co-financed with a loan. By default, the basic collateral accepted by the banks is a blank promissory note. Often, however, a promissory note alone is not enough and usually, several collaterals are established for business loans.

The higher the amount of “lost” credit,

The higher the amount of "lost" credit,

the more thoroughly the circumstances of its granting are investigated. It is analyzed which factor decided about loan default, whether it could have been foreseen earlier, whether at the stage of creditworthiness analysis no error was made.

Due to the fact that banks have different internal procedures, it may happen that a company in one bank receives a negative decision and in another – accepting a higher risk – receives a loan. The waiting time for a decision will often be different, depending on many factors.

The larger the amount of credit you apply for, the more complex your creditworthiness assessment will be. In the case of a bank that lends a lot of companies from a given industry and the risk related to its specificity is well recognized, the decision will be made faster than where such knowledge is limited.

The organizational efficiency of the bank is not without significance here. It is worth submitting a loan application at several banks and then comparing the offers. What matters to every customer is whether they get the loan they need. For borrowers with a “clean” credit history, getting even a high cash loan shouldn’t be a problem if he proves his credibility. When you need a good loan, click this link and you will definitely be able to choose the best offer.

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