1. General
Collateral is an important part of the credit and banking system. They serve to give the lender a certain degree of security that in the event of a loan default, he can get back the money he has owed.
Collateral is an asset that serves as collateral for the lender. The more reliable the collateral for the loan commitment is, the better the conditions in the loan agreement can be negotiated in favor of the borrower.
If the borrower fails to repay his loan, the lender has the right to liquidate the security to minimize his losses.
The following article explains the different “main types” of loan collateral and how they are used.
2. Definition and terminology of loan collateral
Collateral is a form of loan security that allows lenders to fall back on the borrower’s assets in the event of default. The borrower’s – or a third party’s – property can be used as collateral for the loan and thus represents a guarantee for the lender that the loan will be repaid.
3. The different ways to secure credit/loans
The main categories for loan collateral are personal collateral, real or physical collateral and the assignment of claims.
In detail, the most common loan collateral / loan collateral can be listed as follows:
a) Guarantee
A surety bond is an agreement between a borrower and a guarantor whereby the guarantor will repay the debt or obligation under the loan in the event of the borrower defaulting. The guarantor thus assumes responsibility for repaying the loan in full if the borrower is no longer able to make his payments.
The regulations on the guarantee can be found in §§ 765-778 BGB.
b) land charge and mortgage
A charge and/or mortgage is a lien on real property.
The borrower makes his property available as collateral for the loan. In the event of default by the borrower, the lender can liquidate the property to ensure repayment of the outstanding loan.
c) Lien (§ 1204 BGB)
A lien is a loan security relating to a tangible asset such as a car, jewelry or other valuables. In the event of default, the lender is given the right to sell the pledged property in order to recover the outstanding loan.
d) Assignment (cession)
The cession as a loan security instrument is an assignment of receivables in the context of which the assignor (e.g. a metalworking company) assigns trade receivables to the assignee (e.g. a bank).
e) Other Security Interests and Loan Collateral
Other security rights and credit securities are the assumption of debt, the assumption of debt, the guarantee, the letter of comfort, the retention of title, etc.
4. The realization of the loan security or the collateral
The realization of a loan security or the collateral is usually carried out by foreclosure or receivership.
In foreclosure, the borrower’s assets are sold or auctioned off to repay the outstanding loan.
In receivership, the borrower’s assets are administered by a trustee to repay the loan from the funds generated from administration.
This article does not constitute concrete and individual legal advice, but only provides a rough initial overview of the very complex legal matter described. You can only obtain legal certainty for your specific case constellation through coordinated examination and advice from a competent lawyer.
I would be happy to assist you as a lawyer and specialist lawyer for a legal assessment and assessment of your case and I will assertively and resolutely represent your interests and claims in connection with a loan commitment and security rights. Feel free to contact me by phone or write to me.
I advise nationwide on site or via zoom as a specialist lawyer in the legal areas of corporate law, tax law, banking law (especially security rights) and insolvency law, including in the cities and metropolitan areas around Stuttgart, Heilbronn, Karlsruhe, Freiburg, Ulm, Augsburg, Munich, Frankfurt, Wiesbaden, Saarbrücken, Kaiserslautern, Bonn, Wuppertal, Duisburg, Nuremberg, Munster, Saarbrücken, Düsseldorf, Cologne, Dortmund, Hanover, Kassel, Leipzig, Dresden, Bremen, Hamburg and Berlin.
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