Maybe not many people know the meaning of “Collateral Assets”, although some people may have heard or used the term. In the financial sector, the term collateral asset has a definition.
In this discussion, we will discuss collateral assets related to finance. In general, these collateral assets are usually also related to other terms, namely high ratio loans, investments and banks.
Definition of Collateral Assets
Collateral assets are defined as being in the form of property, securities or other assets that have been tied up as collateral to support the issuance of bonds, debentures or loans (pledge assets).
Definition of Collateral Assets
Collateral assets are assets or valuables that are used as collateral to provide loans so that borrowers can obtain debt or loans. collateralized assets can reduce the down payment generally required for a loan and reduce the level of repayment burden that will be made later. assets that are guaranteed and can be cash, equity or securities, bonds, and so on.
Advantages and Disadvantages of Collateral Assets
Based on the economic dictionary, collateral assets or also called pledge assets are assets in the form of property, securities or other valuable assets that have been tied up as collateral to support the process of issuing bonds, loans or debt securities. In other words, collateral assets are valuable assets used as collateral by lenders to enable borrowers to obtain debt or credit.
The assets used as collateral can later reduce the down payment for the loan and the burden of subsequent payments. The form of assets that can be pledged as collateral can be cash, applications, shares or other securities. This type of transaction certainly has advantages and disadvantages. So, what are the advantages and disadvantages of loan assets? Below we have presented several advantages and disadvantages of loan assets.
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Advantages of Collateral Assets
There are advantages to collateral assets, including the following:
1. Secure Asset Ownership
One of the things that is very beneficial for someone when securing collateral is that the borrower can still maintain ownership of the property they use as collateral. This is good news, because many types of credit have big risks if the borrower is unable to pay one of the property rights.
2. Avoid Tax Fines
Want to make a loan and avoid tax penalties, borrowing using collateral assets could be an option for you. Thanks to collateral assets, you as a borrower can avoid tax penalties for the sale of your assets. Of course, you really need to consider this method.
3. Avoid large down payments
Not a few people use collateral assets because of the friendly loan down payment amount. Collateral assets are very profitable for borrowers because they can avoid paying quite large down payments on loans. However, this applies if the lender enforces it. However, you don’t need to worry anymore because every lender using the collateral asset method usually provides this service.
4. Lower Interest
Want a loan transaction with low interest? Try collateral assets. The advantage that you can get from collateral assets is that the borrower can receive a lower amount of interest on the mortgage or loan. Of course that could be a good thing.
5. Always Earn Income
Another advantage of collateral assets is that they allow borrowers to always earn income. However, borrowers certainly have an obligation to regularly report their income from the investments they have made.
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Disadvantages of Collateral Assets
Even though they have several advantages, collateral assets also have several disadvantages. A number of existing shortcomings do not deter potential borrowers, considering that the risks are not large, quite a few people still choose collateral assets. But quite a few borrowers also have problems with these deficiencies. So, what are they? The following are the disadvantages of collateral assets, including:
1. Limited Securities Transactions
The first disadvantage of collateral assets is that the possibility of buying and selling securities is limited. These transactions are limited if the investment you use is shares or mutual funds.
2. Risk of Losing Assets
Even though it was previously said that the borrower can still maintain ownership of the property, this does not mean that this is certain. The reason is, the borrower still has the possibility of losing his assets if a default occurs. So be careful when making transactions when placing collateral assets.
3. Be careful when not paying down payment
This collateral asset is convenient for borrowers because it can provide down payments at low interest points, however, you also need to be careful. Think before applying for collateral assets because if you don’t pay the specified down payment then the loan interest will be paid in full. So be wise when taking out a loan.
4. Lender May Request Additional Funds
You also need to be careful when borrowing funds with collateral asset transactions. If the promised securities transaction has a low or decreasing value, there is a high possibility of giving a loan to request additional funds. This scenario can suddenly happen anytime and anywhere.
5. Relative Risk of Default
Collateral asset transactions for disasters have a relative risk of default. it can result from the borrower’s lack of control over repayment. So it is very important to provide loans to ensure potential borrowers can make payments.
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Difference Between Unsecured Credit and Secured Credit
Unsecured credit and secured credit are both credit services available in banking. In the past, if someone wanted to take out a loan, someone also needed to include securities such as BPKB and house certificates to serve as collateral.
collateral for assets needed to ensure that the borrower will return all the nominal loan amount and interest within the specified time period. Now you can directly apply for a loan without any collateral or collateral.
So actually which one is most suitable for use? Come on, find out and pay attention to the discussion regarding the differences between the two to choose which one is more suited to your needs.
1. Based on loan amount
The loan amounts for both credits provided by banks vary, each bank has its own policy regarding the maximum amount that can be borrowed. Credit with collateral has a larger maximum loan amount than credit without collateral. Usually, credit with collateral allows every customer or borrower to apply for loans of hundreds of millions to billions.
Limits for unsecured credit generally range from 50 million to 200 million. The more the nominal loan amount applied for by a customer, the more the conditions will increase. However, the loan rules remain the same, namely there is no need to use any collateral.
2. Based on objectives
Each person’s goal in applying for a loan is of course different, some people use it to develop their business, some people have to renovate their house or make other urgent payments. However, generally customers who apply for credit without collateral and credit with collateral have the same goal.
Customers who want to buy a house or open a business use more credit with collateral, this happens because the limit given for credit with collateral is greater. On the other hand, customers who need loan funds for basic things will use more unsecured credit.
If you look at the purpose, you can conclude that credit with collateral is more often chosen for long-term payments. while it means no account and is preferred for short-term payments.
3. Based on Tenor
For the loan tenor, unsecured credit is given less time by the bank to pay off the loan. The majority of banks in Indonesia give their customers a term of 2 to 3 years. However, there are also a number of banks that provide longer tenors, namely 5 years.
On the other hand, credit with collateral is given a fairly long period of time compared to credit without collateral. The majority of banks provide credit repayment periods of up to 300 months or the equivalent of 25 years. The amount of loan that each customer borrows will determine how long it will take to repay the credit.
If the loan nominal is small, then the tenor given is also small. However, on the other hand, if the loan nominal is large, the tenor given will also be greater.
So, if you want to return the credit faster than the specified time, that is not a problem. There is nothing wrong with returning credit sooner than the available time.
4. Interest Rates
The interest rate given for credit with collateral is much lower than for credit without collateral. Where, each bank’s interest rate also has its own policy in providing interest rates that must be paid by customers.
Some set interest rates at 10%, 15%, and so on. Regarding interest rates, you need to carefully understand the type of loan interest that applies. Is the interest rate flat or not? Before borrowing, make sure that you have taken into account your abilities and needs so you don’t get trapped in debt.
5. Fund Disbursement Process
According to the applicable terms and conditions, you can actually find out how the funds disbursement process is carried out. Creative with guarantees has a more complex fund disbursement process and takes quite a long time. Where, the bank needs to assess and evaluate the assets owned by the customer. Moreover, if there are customers who apply for very large loans.
The assessment must be carried out more strictly. for unsecured credit, the process of disbursement of funds is carried out more quickly. Even without collateral, disbursement of funds still needs to go through an assessment and approval process from the bank. But the process is very fast so the loan funds can be used more quickly.
That is the discussion about collateral assets and a number of related matters. Hopefully the information above can increase the knowledge of readers and help you consider things before committing to collateral assets.