Do you have an asset? Then understanding collateral loans in the Philippines will be easier for you. Some of us are fortunate enough to possess valuables or possessions. It might be a vehicle, priceless tools, a home over our heads, or something similar. We could take use of them in times of need, such as when we’re strapped for cash, in addition to using them as intended. In this article, we’ll be discussing about using these valuables in a collateral loan. But first, what are collateral loans?
What is a Collateral Loan?
They are a sort of secured loan where you give a bank or other financial institution your chosen asset in exchange for the loan. Because of this, secured loans are simpler to obtain than unsecured ones.
But like every loan, it has advantages and disadvantages as well as everything in between. Is a housing loan without collateral better than one with collateral? Is obtaining a collateral loan ultimately worthwhile? Find out by reading on.
What is collateral?
A secured loan known as a “collateral loan” requires the debtor to commit a specific asset, such as real estate or financial security, in exchange for loan approval. If the debtor is unable to pay the lender, the lender may be able to collect the loan amount by taking possession of the collateral.
When it comes to loans with collateral, factors like terms, interest rates, and loan amounts can be negotiated using the value of the collateral. Because of this, the borrower typically receives higher sums and can benefit from longer terms when taking out a collateral loan, depending on the pledged collateral.
A collateral is an asset you can provide the lender as security for your mortgage. In the case of a loan for house improvements, the banks might request the land title as security. In the event of a foreclosure, the bank is entitled to sell the property and assert its legal claim.
What are the different forms of collateral permitted in the Philippines?
As long as it complies with the law, you may use any asset that the creditor accepts as collateral. Lenders typically favor assets that are simple to value and can be quickly converted into cash. Imagine a savings account with money. It is excellent as collateral because lenders already know how much it is worth and because it is simple to obtain.
1. Property
One of the most popular forms of collateral employed by Filipinos is this. One of the most usual choices made by borrowers is to pledge their property as security. Real estate, individual possessions, vehicles, motorcycles, and similar items are included. The best investment is real estate because it has a high value and little chance of depreciation. However, be aware that failure to make payments on your end could quickly result in the loss of your possessions.
If you don’t keep up with the agreed-upon loan payment terms, financing companies have the power to seize your property. The vendor may or may not keep your property once it has been seized; they may even decide to sell it, usually for far less than market value, as their primary concern is getting their hands on your money as soon as possible. When the service provider decides to sell your assets, you continue to bear all of the price risks.
2. Equipment
Anything you need to run your business, such as desktops, printers, and copier machines, can be utilized as collateral. These are typically large pieces of equipment including machinery, classroom supplies, and office furniture. Be prepared for funders to request the equipment being offered as collateral’s receipt in order to determine its value.
3. Payment Security
Cash can also be used by borrowers as security. They must obtain a loan from the bank where they have an open account in order to do this.
By doing this, they grant the bank the authority to take the money from their current account in order to pay back the loan. In this case, the bank has the right to use the money in his active account to collect the entire amount of the business loan by consenting to use it as collateral.
4. Inventory Financing
By offering your goods as collateral, you grant the financing company the right to take it in the event that you are unable to make your loan payments on time. In such circumstances, the provider may be able to sell the inventory products. In order to obtain a loan, a borrower will sometimes pledge his stock, raw materials, finished items, or any inventory.
5. Finance for Invoices
Additionally, small businesses have the choice to put up future invoice payments as security for a loan. In this situation, the lender will give the borrower a loan based on a future invoice that the borrower will receive.
6. Blanket liens as security
Liens are the final kind of collateral that debtors may use. It is a lien as a legal term that enables lenders to sell the assets of a company that has defaulted on a debt. A blanket lien allows banks and lenders to claim whatever kind of collateral a debtor owns in the event that payment is not made. This theoretically confers a legal interest on lenders in the assets used as collateral.
Other most common types of collateral include:
- Real estate, real estate
- Motorized devices
- Various Appliances
- Maritime Craft
- Livestock
- Equipment and machinery
- Future payments from clients or receivables
- Personal resources (like such as your house and lot)
Difference Between Secured and Unsecured Loans
When you apply for secured loans or house and lot collateral loans in the Philippines, you promise the lender your assets and grant them the right to take the collateral as security if the loan is not repaid on time. Funding providers are given the confidence that whatever happens—whether you miss a payment or completely default on the loan—they will be compensated for it by the submission of collateral.
Please take note that even if the provider is given the authority to seize your property, this does not absolve you of responsibility. In the event that the proceeds from the sale of your asset fell short of fully compensating them for the debt, you might still be obligated to pay it.
Security Loan (Collateral Loans)
The benefit of applying for a secured loan is that the interest rate funding companies often charge is generally lower. This is so because loans with collateral are viewed as low-risk loans. In addition to potentially qualifying for a loan with a reduced interest rate, lenders are more inclined to approve secured loans from customers with low credit scores. Let’s just state that applicants with fair or poor credit who wish to benefit from reduced-interest loans should look into secured loans. You should be aware of the risk before agreeing to these loans: By transferring the title to your assets to the finance firm, you are giving them the authority to take your belongings.
Unsecured Loan
An unsecured loan, in contrast to a secured loan, is not secured by any property; instead, it is only supported by the borrower’s capacity to repay the loan on time and credit worthiness. These often represent a higher amount of risk than asset-backed secured loans because they are not guaranteed by assets. As a result of the increased risk, lenders in this situation demand higher interest rates for unsecured loans.
The terms of an unsecured loan are distinct from those of a secured loan, as you might anticipate. The most significant of these is the fact that borrowers of secured loans are not required to commit their assets as collateral. Therefore, unlike secured loans, when borrowers fail to pay loans, their assets are not in danger. Since they wouldn’t need to provide collateral in exchange for a secured loan, this would be the best option for many startups and small and medium-sized businesses to maintain and grow their operations.
Borrowers must develop strong credit in order to be eligible for an unsecured loan. Otherwise, their request for a company loan will probably be turned down if their credit history is dubious.
Suggested Read: An In-Depth Guide To Getting Pre-Approved For A Home Loan
Advantages of collateral loans
1. Compared to unsecured loans, secured loans could increase your chances of being approved.
A secured loan in the Philippines country may offer you better odds of approval than an unsecured loan, depending on the collateral. This is justified by the idea that the risk is lower if you have a more valuable “asset as collateral.” But keep in mind that because this is a collateral loan, your asset could be taken away if you don’t make your loan payments on time. Therefore, be certain that you can stick to your regular payment schedule.
2. You do not require a flawless credit history.
Secured collateral loans, unlike most bank debt and unsecured loans, don’t demand a perfect credit history in order to be accepted because they depend on the collateral that is being held in escrow and the borrower’s ability to pay.
3. In comparison to unsecured loans, secured loans may provide a greater loanable amount.
The amount available for lending that you can obtain through a collateral loan may be based on the collateral’s current market value. As an illustration, some lenders designate 70 to 80% of the collateralized vehicle’s fair market value as the potential loanable amount. The calculated loanable amount is determined by your present income, unlike unsecured loans. Therefore, if your motorbike is still relatively new, be aware that it still has a lot of worth, and ideally you can obtain a greater loanable amount.
What is a Housing Loan?
A housing loan, often referred to as a home mortgage, is a loan provided for the acquisition of a residential property by a bank, mortgage business, or other financial institution that has been approved by the Bangko Sentral ng Pilipinas.
The most popular and frequently recommended form of debt for anyone looking to acquire or purchase real estate is a home loan. Due to the fact that the property is viewed as an asset and serves as collateral for the loan, it is a secured debt. Interest rates for mortgages are typically lower. Either a set interest rate or a loan term ranging from three to thirty years are provided to the lender, which is typically a bank. Once the mortgage is paid off, that is the only time the borrower can obtain the property title.
The essential documents required for the application for a mortgage vary depending on the bank, but they are as follows:
Regarding Collateral Papers:
- Template for an authorization letter for tax mapping and property collateral verification
- TCT/CCT clear copy of owner’s duplicate copy
- Tax declaration, tax receipts, and tax-clearing photocopies
- Lot layout with location and a verified neighborhood map from a geodetic engineer
- a letter of endorsement, a computation sheet, or a contract to sell from the developer outlining the agreed-upon price.
Read more: Home Loan: A comprehensive guide to bank housing loans in the Philippines
Do you need collateral for a housing loan in the Philippines?
The short answer is yes. To ensure that the house loan given is returned on time, banks require collateral. As discussed above, a housing loan without collateral has a higher risk and thus has a higher interest rate.
When you purchase a house and lot from BRIA Homes, the property will serve as the main security for your mortgage. In reality, the loan will be secured by a pledge of your house and lot as collateral. The land and the building that will be built there are typically used as the main collateral when a loan is taken out for a property that will be built. The value of various asset classes used as collateral varies slightly. A case-by-case analysis is always used to determine the collateral value of certain collateral.
It is crucial to determine which bank to apply for a home loan because doing so will help you obtain your dream house and lot and to avoid higher interest rates on a housing loan without collateral. As the requirements must be submitted to the bank assessor for approval, it can be overwhelming. Your information must be open and honest in order to demonstrate your financial capability to obtain a mortgage in order for you to get approved easily in obtaining your house and lot collateral loan Philippines. Additionally, make sure that any credit card and other loan payments are up to date. BRIA Homes is ready to deliver quality and reasonably priced condominium apartments and home and lot packages to everyday Filipino families.
