What are securities?
Collateral is an asset that is accepted by a bank, for example, as security for a loan. Collateral that can be deposited for a loan is, for example, real estate (mortgages) or shares (Lombard loan). The collateral therefore serves to protect the lender. If the borrower fails to meet his debt obligations and defaults as a result, the lender may sell the deposited collateral to compensate for the losses incurred. Collateral thus minimizes the lender’s risk.
The type of collateral is often determined by the type of loan. In the case of a mortgage, for example, the house is the collateral for the loan. In the case of a car loan, the collateral is the car itself. Credit cards can also be secured by a cash deposit in the amount of the credit limit. In general, collateral accepted by lenders includes cars (paid off), savings deposits and investment accounts, but also fixed-interest securities, shares and life insurance policies. For short-term loans (a few weeks), future salary payments can also serve as collateral. Due to the collateral, secured loans often have a lower interest rate as the lender’s risk is reduced.
Types of collateral
Lombard loan
With a Lombard loan, securities are deposited as collateral. This means that the bank grants a loan in the amount of a certain percentage of a securities portfolio (e.g. 80%). So if there are securities amounting to CHF 1,000,000 in the custody account, CHF 800,000 (80%) could be granted as a loan in the above example. This becomes problematic if the securities (collateral) suddenly fall sharply in value, e.g. in a crisis. The bank can then demand more collateral and if this is not provided, e.g. in the form of additional cash deposits or the deposit of further securities, this can lead to so-called margin calls (forced sale of securities). In good times, banks like to “sell” large Lombard loans, but it is worth weighing up the risks beforehand to avoid being forced to sell at an inopportune moment in times of crisis. To avoid this, it may be worth consulting an expert such as an independent asset manager.
Mortgage
A mortgage is a loan where the house is the security. If the homeowner fails to pay the mortgage, the loan administrator can initiate legal proceedings which can result in the lender taking possession of the house by way of foreclosure. Once the property has been transferred to the lender, it can be sold to repay the remaining loan amount.
Home equity loan
A house can also serve as collateral for a second mortgage or a home equity loan. In this case, the loan amount must not exceed the available equity.
Land charge
Here, a property is used as collateral for a loan.
Personnel securities
In this case, another person is liable for the amount borrowed. This is often guaranteed by a surety. If the applicant’s creditworthiness is not sufficient, the person can provide guarantors who are obliged to cover the remaining debt if there is a risk of non-payment. In this case, guarantors must be creditworthy.
Lien
In the case of a lien, valuable movable tangible assets (e.g. jewelry) are deposited as collateral for a loan. This also includes savings or securities.
Transfer by way of security
Similar to a lien, this involves movable tangible assets (e.g. a car). However, the borrower remains the owner of the collateral during the term of the loan, provided he does not default on payment, and therefore has the right of use. The lender, however, remains the legal owner.