What are the market dominated by loans? These are the consumer ones that have quite benevolent conditions of acquisition. There are primarily three things to do when applying for them. What are these things? It is:
- Regular income security
- Wage in sufficient amount
- Good financial past
Then there are loans in higher sums. And in the order of several hundred thousand crowns, as well as loans, which are in millions. Something extra needs to be done here. What’s going on? Liability. This has advantages but also disadvantages. Let’s look at both sides of this requirement that banks and non-banking companies may have.
It is easier to get a loan
The first positive that this option has, however, is that it is much easier to get such a loan. There are cases where the salary would not be sufficient and the application would be rejected. However, when adding the possibility of a guarantee of some property or another wage of the guarantor himself, the provider himself has more security in his hand. This reduces his risk, increases the client’s creditworthiness and the result is that getting a loan is easier.
The whole thing can also be seen from the perspective of clients. Although providers must now be more rigorous in assessing their ability to repay, this has not been the case in the past. So for some loans it was enough to just stop the property and there was no need to prove income or information about the financial past.
The interest rate may be lower
How is the interest rate the client receives on the loan? It’s according to his creditworthiness. It is not necessary to increase it only by increasing income. The creditworthiness and its amount is again decided by the above mentioned liability. Ideally real estate. The client is thus considered to be highly creditworthy, which can result in an interesting reduction in interest. For those who are looking for the most advantageous loan on the market, it is a matter of whether it is better to go the classic way in the form of consumer loans or to use the way where it can be guaranteed. An example is the US mortgages, which, especially in connection with banks, are the best. Their brief characteristics are quite clear:
- Smaller amounts can also be borrowed
- Money can be used for anything
- Various types of real estate can be guaranteed
Liability does not have to be associated only with property
The advantage of the guarantee is also that it is not necessarily associated exclusively with the property. You have certainly heard the term guarantor. This is an option where the loan is guaranteed by another person. It may be a husband or wife, it may be someone from the family, as well as there is no problem with being just someone known. This is also an advantage for those who apply for the loan, because when the guarantor is needed, they do not have to worry about necessarily having to search only within the circle of the closest people.
Assets under guarantee need not belong to the applicant
What if property security is required? Here again comes an interesting advantage. Many people believe that they must own the property. Of course, most of these are real estate such as houses or apartments, as well as holiday homes or land. But the fact is that ownership is not so important. An example could be the guarantee of a cooperative flat, ie a stake in a particular cooperative – but here it is necessary approval from the given cooperative. Equally, it is also possible to guarantee property that someone else really has. This is similar to that of the guarantor. It can be someone from the family, like a friend or a colleague from work. If the person has a property and is willing to stop it, this is not a problem.
If the applicant fails to repay, the guarantor repays the loan
Let’s also go to the disadvantages. This is definitely the first. It concerns such a guarantee for a loan where a guarantor is necessary. That is, the person who, like the borrower, is listed in the contract. In addition to being able to help in obtaining a loan, he also has another task in the whole relationship. This is linked to a possible future repayment. If the applicant himself ceases to pay his installments, the obligation is transferred to the guarantor. While this helped someone to raise money, but this step can also quite significantly retaliate. Even if he himself did not get any money, he would have to pay it. Maybe even several decades. And this is a risk not everyone wants to take.
In case of default, property can be lost
Let’s also look at a situation where property is guaranteed. What negatives appear at the moment? Again, it follows that the loan will not be repaid. As with any loan, the first steps are associated with reminders. And what are the last steps? They are associated with the loss of the property. Unlike execution, where it is necessary to first undergo a complex administrative and judicial process, the pledge of real estate is much easier and thus much shorter. Losing a house or apartment is a fairly real threat in the event of default.
You can never get the full value of a property
Low interest or easier way to loan. These are clear positives. But there are also negatives. What are they? They relate to the amounts that can be obtained in connection with the mortgaged property. They never reach the value of the property. To be more specific, it has been possible in the past for classic bank mortgages. However, the new legal regulations came with the fact that it is always necessary to lend less than the guaranteed real estate itself. In the non-banking segment, the situation is even worse. Especially when a problem client asks for money, with not very good creditworthiness. He can only get a fraction of what his property costs. It is not unusual that even half the amount is provided. And so the pledge of the apartment in a million value, for which it is possible to obtain a loan of only 500 000 CZK, is really not very convenient.