Definition of Collateral Assets: Advantages and Disadvantages of Collateral Assets

Definition of Collateral Assets – Perhaps not many people know about the meaning of “collateral assets”, although some people may have heard or used the term. In the field of finance, the term collateral assets has a definition.

In this discussion, we will discuss collateral assets related to finance. In general, these collateral assets are usually also associated with other terms, namely high ratio loans, investments, and banks.

Definition of Collateral Assets

Collateral assets are defined as property, securities or other assets that are bound as collateral to support the issuance of bonds, debentures or loans (pledge assets).

Definition of Collateral Assets

Collateral assets are assets or valuable assets that are used as collateral to provide loans so that borrowers can obtain debt or loans. Collateralized assets can reduce the down payment normally required for a loan and reduce the level of burdensome payments that will be made later. guaranteed assets 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 are bound as collateral to support the process of issuing bonds, loans or debentures. In other words, collateral assets are valuable assets that are used as collateral by lenders to enable borrowers to obtain debt or credit.

This asset 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 can be in the form of cash, applications, shares or other securities. This type of transaction certainly has advantages and disadvantages. Then, what are the advantages and disadvantages of loan assets? The following has presented some of the advantages and disadvantages of loan assets.

Advantages of Collateral Assets

There are advantages of collateral assets, including the following:

1. Ownership of Secured Assets

One of the things that is very beneficial for someone when carrying out collateral assets is that the borrower can still maintain ownership of the property that is used as collateral. this is good news, because many types of credit have a big risk if the borrower is unable to pay for one of the property rights.

2. Avoid Tax Fines

Want to make a loan and avoid tax penalties, borrowing by way of collateral assets can be an option for you. thanks to collateral assets, you as a borrower can avoid tax penalties for the sale of assets that you do. Of course, this method is very necessary for you to consider.

3. Avoid Large DP

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 a loan down payment in a sizable amount. However, this applies if the lender enforces it. However, you don’t need to worry anymore because every lender using the collateralized 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 borrowers can receive lower interest rates on mortgages or loans. Surely that could be a good thing.

5. Always Get Income

Another advantage of collateral assets is that they allow the borrower to always receive income. however, the borrower certainly has an obligation to report his income periodically from the investment he has made.

Disadvantages of Collateral Assets

Although it has several advantages, collateral assets also have some disadvantages. a number of existing deficiencies do not make prospective borrowers back down, considering the risk is not great, not a few people still choose collateral assets. but not a few borrowers also have problems with these deficiencies. Well, what are they? Following are the disadvantages of collateral assets, among others:

1. Limited Securities Transactions

The disadvantage of the first collateral asset is that the possibility of buying and selling securities is limited. the transaction becomes limited if the investment you use is stocks or mutual funds.

2. Risk of Losing Property

Even though previously it was said that the borrower can still maintain ownership of the property, this does not mean that it is certain. This is because the borrower still has the possibility of losing his property in the event of default. So be careful when making transactions when making collateral assets.

3. Be careful when you don’t pay a down payment

This collateral is convenient for the borrower because it can provide a down payment with a low interest point, however, you also need to be careful. Think before applying for collateral assets because if you don’t pay the specified down payment, the loan interest will be paid in full. So be wise when making loans.

4. Lenders Can Request Additional Funds

You also need to be careful when borrowing funds with collateral asset transactions. If the promised security transaction has a low value or decreases, it is likely to provide a loan to request additional funds. This scenario can suddenly happen anytime and anywhere.

5. Relatively at Risk of Default

Transactions of collateral assets for disasters have a relative risk of default. it can result from the lack of control over repayments from the borrower. it is very important to give loans to ensure that potential borrowers can make payments.

The Difference Between Unsecured Loans With Guaranteed Loans

Unsecured credit and guaranteed credit are both credit services available in banking. In ancient times, if someone wanted to make a loan, someone also needed to include securities such as BPKB and house certificates to serve as collateral.

collateral for the assets needed to ensure that the borrower will return all the loan amount and interest within the specified time period. now you can directly apply for a loan without collateral or collateral.

So which one is the most suitable for use? Let’s find out and pay attention to the discussion regarding the differences between the two to choose which one is more suitable for your needs.

1. Based on Loan Amount

The loan amount for the two loans provided by the bank varies, each bank has its own policy regarding the maximum amount that can be borrowed. Secured loans have a larger maximum loan amount than unsecured loans. usually, collateralized credit allows every customer or borrower to be able to apply for hundreds of millions to billions of loans.

The limit for unsecured loans generally ranges from 50 million to 200 million. the more the nominal amount of the loan submitted by a customer, the conditions will also increase. However, the loan rules remain the same, that is, you don’t need to use any collateral.

2. Based on Purpose

The purpose of each person in applying for a loan is of course different, some are used to develop a business, while others have to renovate a house or other urgent payments. but generally customers who apply for loans without collateral and credit with guarantees have the same goal.

Customers who want to buy a house or open a business use more collateralized credit. This happens because the limit given for collateralized credit is greater. Conversely, customers who need loan funds for basic matters will use more credit without collateral.

When viewed from its purpose, you can conclude that secured credit is preferred for long-term payments. while it means no account and preferable for short term payments.

3. By Tenor

For loan tenors, credit without collateral 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 a longer tenor, namely for 5 years.

On the other hand, collateralized loans are given a longer period of time than unsecured loans. the majority of banks provide credit repayment times of up to 300 months or the equivalent of 25 years. The loan amount that each customer borrows will determine how long it will take to return the credit.

If the nominal loan is small, then the tenor given is also small. However, on the contrary, if the nominal loan is large, the tenor given will also be greater.

So, if you want to return the credit faster than the specified time, that’s not a problem. There’s nothing wrong with returning credit faster than the time available.

4. Interest Rates

Interest rates given for collateralized loans are much lower than for loans without collateral. Where, the interest rate of each bank also has its own policy in providing interest rates that must be paid by customers.

Some set interest rates of 10%, 15%, and so on. Regarding interest rates, you need to understand carefully the type of loan interest it 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 stuck in debt.

5. Fund Disbursement Process

According to the terms and conditions that apply, you can actually find out how the process of disbursing funds is carried out. Creative with collateral has a process of disbursing funds that is more complex and takes quite a long time. Where, the bank needs to assess and evaluate the assets owned by customers. What’s more, if there are customers who apply for very large loans.

Assessment must be carried out more stringently. for loans without collateral the process of disbursing funds is carried out more quickly. even without collateral, disbursement of funds still needs to go through a process of assessment and approval from the bank. But the process is very fast so that loan funds can be used more quickly.

Thus the discussion of collateral assets and a number of related matters. Hopefully the information above can add insight to knowledge for readers and help you consider things before committing to collateral assets.