The term secured loans is used when borrowers, who take out a personal loan, offer assets as collateral that can be liquidated in the event of a default. These securities are used to minimize the credit risk for the lender. The lender is generally free to require collateral when granting loans. Depending on the credit rating of the borrower as well as the market situation. Particularly, this is often the case for SMEs and self-employed individuals, when taking out a business loan.
However, a security can also serve to obtain favourable loan conditions. If you own a property, for example, about 60% of the market value is accepted as collateral for excellent conditions.
These are the common types of collateral:
real estate: probably the most frequent type of collateral is real estate, such as residential or commercial buildings. They can be used for mortgages as well as for other secured loans.
fleet: cars, trucks, motorbikes and other vehicles can be used as collateral in secured loans, mainly for car loans.
securities: stocks, bonds, fund shares and other securities can be used as collateral for secured loans. This is also known as a Lombard loan. Should borrowers not meet their obligations, their securities can be seized and sold by the lender to settle the outstanding debt.
savings and investment accounts: money in savings or investment accounts can be used to secure loans. The lender is given the right to access the account and withdraw money if the borrower does not meet his payment obligations.
surety bond: a surety bond is a commitment by a third party (e.g. a family member, friend, or business partner) to act as guarantor for the borrower. If the borrower defaults or fails to pay, the lender can collect the debt from the guarantor.
life insurance: a life insurance policy can be used as collateral for a loan by the borrower pledging the policy. In case of default, the lender can access the insurance value to cover the outstanding debt.