Low cash loans usually do not require any repayment security by the borrower. However, this applies to loans up to, for example, average national remuneration. With higher loans, banks often require borrowers to set up repayment security in order to reduce the risk of running their lending activities. What safeguards can be accepted by banks?
Most frequently practiced security
While with mortgages the basic security is a mortgage established on a residential property, cash loans have completely different collateral. Very rarely, in practice, the bank decides to secure a mortgage with a cash loan, although such situations occur in some cases. Much more often, however, the collateral requested by banks from borrowers applying for a cash loan may be:
• A promissory note,
• Surety of third parties,
• Assignment of rights under the insurance policy,
• Bail Guarantee,
• Transfer to security,
• Registered pledge,
• Loan repayment insurance,
• Declaration of the borrower to submit to enforcement under banking law,
• Declaration of the borrower to agree to the deduction of amounts equivalent to unpaid loan receivables from remuneration for work.
Credit risk of banks
When granting cash loans, the bank bears a greater risk of non-repayment of the credit liability with interest accrued, on dates specified in the repayment schedule, than with mortgage loans. It is true that mortgage loans are granted in a higher amount than standard cash loans, but nevertheless in their case a mortgage established on the real estate is a solid security for repayment. With cash loans, the lack of any collateral on the bank side would create a real threat that the loan could become a lost loan and the borrower would not repay it to the bank. In this situation, the lack of collateral puts the creditor in a difficult position, which is often in practice no possibility to recover the money borrowed from the client.