Loan security – otherwise known as collateral – is one or more pieces of property (including land, a home, a vehicle or heavy machinery) that a borrower uses to guarantee their loan.
Essentially, this means that if you default on your loan for some reason then the lender can recoup their losses by selling the property you’ve pledged as collateral. As a result of this decreased risk to the lender, secured loans usually benefit from lower interest rates and better loan terms.
Not all security is equal, however. A lender will consider the market value (what it’s currently worth) as well as the liquidation value (how much money they will get from a quick sale). The more difficult a property is to liquidate, the less value it has as collateral for a loan.
There are some key questions that a lender will consider when scrutinising the security on offer:
- Is the proposed collateral acceptable to the bank?
- Is there a secondary market available for the collateral, and how easy is it to liquidate?
- If support collateral is being used in addition to the principle security, how will it be measured?
- Does recourse to guarantors of the transaction carry any measurable value?
- Will agreed upon loan conditions (covenants) offer any additional security to the bank?
Offering high-value, easily-liquidated property as security will be looked upon more favourably by lenders, and will improve your chances of loan approval.