Collateral – Definition & Explanation

As the word credit collateral says and formulates, the lender is anxious to secure his credit as best as possible. From the moment that the loan has been paid out to the borrower, the credit institution has the risk-usually theoretical-that the loan will also be repaid in accordance with the contract. These are the loan amount granted and the agreed loan interest. If they are not or only partially paid, then that reduces the profit on the lending business.

Payment problems with the repayment amount, on the other hand, result in a loss because the lender gets less money repaid than he lent. Credit in Latin means credere, translate into German or faith entrusted. This may be sufficient in the private sector for a personal loan, but not in business for commercial lending. The credit institution must have as many collateral and equivalent collateral as possible for the loan, which can then be used if there are payment problems in the loan repayment.

What are collateral?

What are collateral?

Credit collateral is the equivalent in terms of personal and material assets to the loan granted or received. Both must be literally made money in the given case. Typical personal security, also called personal collateral, is the guarantee, the guarantee or a letter of comfort. It is a collective term in corporate law for all statements of obligations under which a company as “patron” for its subsidiary as a borrower assumes the credit obligations. One takes over the guarantee, the guarantee or the patronage for the other. The lender generally agrees to this, as long as it improves the creditworthiness of the borrower and reduces the credit risk. A common security is the mortgage as a real estate financing.

The construction loan in the six-digit euro area is doubly secured; on the one hand by the creditworthiness of the client, on the other hand by the land charges in the land register of the real estate. Collateral security is collateralised as collateral only for a certain proportion of its value. Depending on the bank, the land charge for a property is up to eighty percent of the market value. The guarantee as a personal security, however, is secured in full, ie up to one hundred percent.

What collateral is important for a bank?

What collateral is important for a bank?

The lender prefers those collateral that he most likely and easily has direct access to. These are primarily personal security such as the guarantee. Number of borrowers does not, takes the place of the guarantor. A letter is sufficient for the debt service to be taken over immediately. The type of security is directly related to the loan.

The car loan is secured by the deposit of the vehicle registration certificate Part II, the previous motor vehicle letter. Without this document, the vehicle owner can not sell the car; he can neither sell nor give it away. The credit institution thus secures the right of disposal of the car, but not the value preservation. In a total loss, the vehicle is worthless. The car loan remains unaffected, but the lender can not make the deposited car letter money. Significant loan collateral includes all mortgages and transfers of movable assets and movables.

How do banks rate collateral?

How do banks rate collateral?

Apart from the general lending guidelines, which apply in unison to all credit institutions under the terms of Basel II, each of them has its own in-house evaluation criteria. They differ significantly for loans to commercial companies from those for private individuals; But they are also quite individual for each individual bank.

Consumer and consumer credits for purposeless use are secured only by the creditworthiness of the borrower. Here the credit bureau score is the ultimate. This is also used as a basis for a construction loan, which is additionally secured by a land charge entry. In addition, the client concludes a residual debt insurance or a term life insurance. As a result, the loan for premature death is replaced immediately. The open balance of the loan is cleared and the property is debt free.

In general, the principle that credit security must be so high-value and high that it is sufficient to balance out the outstanding balance of your credit at all times. With increasing repayment duration, the associated collateral can also be reduced.

Initiative wants credit bureau algorithm to crack with data donation

Are the factors of Credit bureau scores soon public?

Credit bureau considers its credit rating algorithm as a business secret. This annoys data and consumer advocates as well as many borrowers. However, the BGH gave the Credit bureau right. Now the tide could turn: an initiative calls consumers to donate data. Using data from tens of thousands of consumers, the Credit bureau algorithm could be uncovered.

The two non-governmental organizations AlgorithmWatch and Open Knowledge Foundation want to crack the Credit bureau algorithm. For this purpose, as many Credit bureau outlets as possible should be collected in the first step. In the second step, this information will then be evaluated by experts from the news magazine and the Bavarian Broadcasting Corporation.

By mid-March, about 30,000 USD will be collected. The goal is to develop open source software that will allow the initiative to scan, read, and transmit and store the Credit bureau communications.

The initiators do not say how many Credit bureau data sets relate to this project. In a second step, further money will be collected for the evaluation of the data. When this contribution was made, more than $ 29,000 had already been pledged.

Criticism of “small number with great effect”

Criticism of "small number with great effect"

The initiators complain:

The notorious Credit bureau score has far-reaching effects. If you have too few points, you are left empty (). But how does the score come about? And is he reliable at all? Or is the data outdated and the algorithm incorrect? We want to find out, because it can not be that a single number has such a big impact.

The goals of the initiative are also clearly stated. A “continuous social debate on the effects of such scoring procedures” is to be achieved. The aim is also to “ensure regular monitoring by means of exhaustive examinations by independent social institutions”.

The initiative demands: “Credit bureau and other credit bureaus must publicly and permanently demonstrate how their score works and what models they are based on.”

The cabaret artist Nico Semsrott explains in this video why the initiative OpenCredit bureau is necessary. And how you can support this initiative. (Copyright and originator: AlgorithmWatch)

What flows into the credit? The Credit bureau is silent!

What flows into the credit? The Credit bureau is silent!

Not much is known about the composition of the Credit bureau score. Certainly Credit bureau uses a peer group procedure. This means that the creditworthiness of a person also depends on how good the creditworthiness of other persons with similar characteristics is.

Wise z. If, for example, people with five credit cards have a statistically higher probability of payment default, the credit rating of a person with five credit cards tends to be worse regardless of whether invoices have been paid on time were or not.

Consumer advocates assume that an excessive number of credit cards will have a negative effect on Credit bureau scores as well as frequent moves. Also, the frequent completion of loans with small installments tends to be bad for your own creditworthiness. Again, there is the peer-to-peer principle: Who pays a toaster in installments, likely to be more likely in payment default than others.

Who pays a toaster in installments may have a worse credit rating

Who pays a toaster in installments may have a worse credit rating

The Credit bureau keeps the composition of their scores secret, but makes the result available to everyone. By means of self-assessment, consumers can find out which scores have been determined for themselves. Decisive are the so-called Credit bureau industry scores, which are transmitted by the credit agency to contracting parties such as banks.

The contractors do not base their decisions on these values ​​alone, but primarily on these values. A good Credit bureau score is not enough for a loan on its own because it also tests your income. A bad score is an exclusion reason. For cell phone contracts, a good score may already be enough for a positive contract decision.

By contrast, the Credit bureau base score, which is given as a percentage, is less significant. Average consumers land at 97-99 percent. The Credit bureau itself states that this value may differ from the more important industry scores.

Whether the initiative in the power of Credit bureau can change something? We will continue to monitor the development and report if necessary!

Higher Credit Conditions Due to US Real Estate Crisis – High Interest Rates.

 Entrepreneurs and consumers in Germany will no longer be able to access loans as easily as Loaniefund estimates. As a result of the US real estate crisis, the banks should assess the risks more stringent, so the credit agency.

The size of the loans would be lower, the conditions would be harder.

The size of the loans would be lower, the conditions would be harder.

A resurgence of corporate bankruptcies is therefore not ruled out. However, there can be no question of a credit crunch for consumers and SMEs.

It is noteworthy how, in the course of globalization and worldwide networking of the markets, a crisis in America is affecting German consumers.

It was not until the bankruptcy of CIV and subsequently Gratsev LB and its recent takeover by Flantebank de Finance (FF) that the public and thus all potential credit customers were brought to the fore, How much American lending practice can (not only) affect the German credit and financial markets.

This does not seem to apply only to those careless Falcon bankers who bitterly regret their investment in US real estate funds. As much as one was surprised yesterday about the heavily indebted American households and the easy-credit practice, while in Germany solid and cover-rich deposits as well as a fee needed to take out a loan, so It is very astonishing that the effects of this crash are reaching Falcony, and that the allegedly so strict lending in Germany was probably relatively lax.

After all the major central banks have pumped billions of usd into the market to prevent, among other things, a huge increase in interest rates, the effects are only gradually becoming visible. Similar to the morning after the big storm, the rebuilding and repair work always begins when the storm has all confused everything. Proliferation can then only be made to avoid a similar disaster the next time.

So financial institutions decided to tighten the terms for loans again.

So financial institutions decided to tighten the terms for loans again.

On the one hand, what could mean the end for online and instant loans would be a hard blow to the middle class. Countless businesses live on loans and would not be able to cope with an end to the flow of money due to tougher conditions. While private borrowers have to give up one or the other luxury items, entrepreneurs would have to calculate even scarcer than they already do anyway anyway, and ultimately many central bankruptcies would result.

So it is probably just for the big and reputable financial institutions to reconsider their lending practice in any case and perhaps introduce one or the other new regulations. Nevertheless, the tightening conditions on borrowing should not result in a slowdown in the upturn and entrepreneurial spirit. To be sure, the banks must also rethink their own system, ie also the incentives for employees to arrange a loan, because even this extra money for selling a loan can blind the employees, if, on the basis of a prospective special payment, they both turn a blind eye and ignore any possible lending-related facts, such as lack of credit.

That, for example, the construction rate will rise, does not change the fact that even before the crash just such large investments should be well thought out and calculated. Whether one chooses longer maturities and higher repayment installments or waits until sufficient equity capital is available to cover a certain part of the sum, of course remains left to the customers themselves. Ultimately, not only should they be the ones who have to bear the financial burden of the consequences of the mismanagement of some bank managers.

Delete credit bureau prematurely: For small claims possible!

Negative entries in the credit bureau can be deleted prematurely, even if they are correct and self-inflicted. credit bureau allows consumers to quickly cleanse and thus preserve their creditworthiness for low and short-term payment defaults.

Germany’s largest credit bureau lists four conditions that must be satisfied for early deletion of credit bureau contributions. Firstly, credit bureau’s claim must not have been notified before 1 January 2007.

Second, the claim amount may not exceed 1,000 usd.

Second, the claim amount may not exceed 1,000 usd.

Thirdly, the claim must have been settled within one month, which must be confirmed by the creditor within this period. Fourth, titled claims are excluded from the special arrangement.

All the above criteria must be met in order for the scheme to be applied to the shorter storage periods. If this is not the case, the regular treatment takes effect: after full payment of the claim, it remains as “completed” in the database of the credit agency for three full calendar years. Contracting parties of the credit bureau inform the credit agency about outstanding, adequately remunerated and undisputed claims.

Avoid long-term damage to credit

Avoid long-term damage to credit

The credit bureau, according to its own admission, wants to give consumers with one-off payments or short-term financial shortages the opportunity to avoid the very long-term damage to their credit. The shortened retention periods can also be in the interest of creditors: they provide an incentive to meet liabilities if at all possible.

Negative credit bureau entries are a major limitation for everyday consumers in everyday life. With negative features, installment loans, credit cards, and even current accounts are difficult or even impossible to obtain. Mobile phone contracts with subsidized equipment or orders in the mail order company on account are also not possible.

The credit bureau stores according to personal data to 65 million people. Overall, the database has 440 million features. According to credit bureau, more than 90 percent of people have exclusively positive data, such as: B. Information about a promptly repaid loan, payment transaction accounts or mobile phone contracts.

If you do not meet the criteria for early deletion, you must continue to use credit, payment transactions and similar products on products that are also available with negative credit bureau income. These include z. B. installment loans without credit bureau, where no query of the credit agency. With smaller credit bureau often even more options. Our official loan, for example, is just as available with moderate negative features as the golden Creditlope MasterCard.

Payday loans at zero interest rate – credit trap with well-being factor

 

Payday loans follow the money market accounts: For new customers is paid

Loans follow the money market accounts: For new customers is paid

If a bank offers new customers 1.5% interest on overnight money, it is also in a loss position because the bank could borrow 0.05% of the money from the central bank. The fact that, at the end of the day, a part of the acquired deposits remains in the house and that the bank does not have to deposit any collateral, unlike central bank loans, does not change that much.

Now this practice is also entering the credit business: limited loan amounts are no longer offered only at interest-free interest rates, but at no interest. With a default risk of 2% and administrative costs of 3%, the costs add up to 000 2,000  net loan amount. So much do banks invest in new areas in other areas. Comparison portals copy this strategy now.

Many small loans damage the credit rating

Many small loans damage the credit rating

There is some evidence that the bill does not work out at the end : unlike call money accounts and, above all, current accounts, advertisers do not have to overcome any convenience fee in order to withdraw after claiming the special offer: Is the loan erased, remains of the noble donor apart from regular advertising not much to see.

That’s why consumers do not have to worry about that. However, the development of personal creditworthiness of those who are too open-minded and frequently make use of cross-subsidized small loans could be cause for concern. It is assumed that many relatively small amounts of credit can burden the credit bureau scores.

This is due to the peer group process, which is used by credit bureaus such as credit bureau to forecast loan default probabilities. A consumer is assigned to groups of other consumers who have a similar feature constellation. Relevant features are z. For example, the number and nature of completed loan agreements. Statistically, consumers with many small loans are more likely to be affected by payment defaults.

It should not be forgotten that fully repaid loans can also improve credit rating as a “positive feature” : the data is stored by credit bureau for three years after full repayment, For small loans, however, the risk of adverse classification appears high. Where exactly a “critical level” begins is unclear, since credit bureaus regard the composition of their scores as business secrets and in this opinion have been confirmed by the BGH.

The marketing war in the credit business raises questions

The marketing war in the credit business raises questions

The “zero-interest policy” of comparison portals and Co. is not the only development in the lending business that is currently raising questions. Another concerns peer-to-peer credit marketplaces, many of which are involved in non-interest-bearing loans. Platforms such as the Berlin-based company centiloan once began with the claim of revolutionizing the credit market: loans were to be granted via marketplaces “from person to person”, with advantages for all those involved.

What hit a nerve in the time frame of the global financial and economic crisis and raised hopes seems to be stuck in a dead end today. In marketing, ie the most visible area of ​​a company, the platforms are today a veritable battle with comparison portals and other actors and are barely distinguishable from these  current TV commercials from centiloan, for example, no longer address the principle of social lending,

And behind the scenes? Already years ago, centiloan banks integrated into the credit marketplace  according to own statement, in order “to be able to offer an altogether broader credit offer”. The Berliners are not an isolated case a significant part of lending in the social lending segment is now apparently by banks or institutional investors such as hedge funds. There are no detailed statistics, not least because a significant part of lending is formally settled through banks.

Pure brand growth at the expense of quality

Pure brand growth at the expense of quality

At present, the lending business seems to be primarily concerned with quantity and brand growth which will inevitably lead to losses in quality. PtoP marketplaces are becoming a mixture of intermediary and credit comparison portal, intermediaries are becoming consumer portals, where the lending business is only one component of many and some portals are switching more advertising than all the major banks together.

The consequences are foreseeable: Where sales targets have to be reached quickly, only customers with a 08/15 profile will be served. Those younger than 30 or over 60, earning less than 2,000 net per month, having negative credit bureau entries, being self-employed, or having to serve maintenance obligations or loans, will be among the most vocal advertisers to be disappointed more often.