Understanding collateral

Understanding collateral

Most lenders normally attach property when they are conducting any form of financial lending agreement with their clients. This kind of transaction is called collateral, where a borrower pledges his house, company to a lender with the thrust of securing repayment of a loan. In this case the collateral makes the lender feel safe in the event that the consumer doesn’t repay the loan hence the property can be sold to reimburse the funds borrowed by a client.

As a result of an array of creditors that have surfaced in response to a demand in loans, South Africa’s National Credit Regulator in 2006 introduced a long awaited credit financing system that would help creditors to secure their loans if any kind of abstraction comes in the way. The new system gave creditors a clout to secure credits which they offer to clients hence a borrower provides a guarantee that should he not succeed to make loan repayments, the lender can compensate the shortfall amount by seizing a property which was presented as security.
It is of paramount importance to note that there are certain creditors who do not offer loans that do not require clients to offer collateral, and these are called unsecure loans. Creditors that offer credit card services fall in a bracket of lenders who do not secure their transactions; this is simply because a client has to make assurance to his creditor that he will pay them at the end of the month.

In the event that the borrower does not redeem the loan, big financial institutions such as banks use a legal process to obtain real estate from a client who dodges on a mortgage loan obligation. Within the banking sector, collateral is traditionally referred to as secured landing.


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