When you apply for a loan to a financial institution such as a bank or financing company, you may already be familiar with the word collateral. In short, collateral is an asset of economic value owned by the debtor which is used as collateral to the creditor when applying for a loan.
With the proliferation of unsecured loans that are currently developing, it does not necessarily make credit with collateral less interested. Usually, collateralized loans provide higher loan ceilings, lower interest rates, and longer tenors than unsecured loans. This is because the credit risk posed is also lower. Because, if one day the debtor fails to pay, the ownership of the debtor's assets or collateral will change hands to become the property of the creditor. These conditions have been regulated in a Credit or Financing Agreement that has been mutually agreed upon and has been based on law.
In this article, the BFI Finance team provides a comprehensive understanding of what collateral is and its types so that you can choose the right collateral to serve as collateral. Read more below.
Definition of Collateral
Collateral is a tangible or intangible asset that is used as collateral for a loan proposed by a debtor to a creditor. Creditors in this case are lenders such as banks or financing companies. Creditors will only receive proof of asset ownership such as Vehicle BPKB and House Certificates during the credit period. This aims to minimize the risk of debtors in default. If the debtor has paid off the debt in full, proof of ownership of the asset will be returned to the debtor. On the other hand, if conditions are found that require the debtor to default with certain criteria, the ownership of the collateral will be transferred from the debtor to the creditor.
This definition is confirmed by the definition of collateral based on the Banking Law Number 10 of 1998 Article 1 paragraph 28, concerning Amendments to the Banking Law Number 7 of 1992, which states that collateral is the ability, ability, or belief of the customer to be able to pay off his obligations in accordance with what it promised.
In this case, collateral plays an important role in credit or multipurpose financing. Because the collateral is used as collateral for the disbursement of a number of funds. The more valuable the collateral guaranteed, the more it will affect the amount of the loan ceiling given.
Generally, the interest rate given to Collateral Loans is lower than Unsecured Loans. This is because collateralized loans provide lower credit risk than unsecured loans.
The following are the functions of collateral in loan application activities:
- To prevent debtors from escaping their responsibilities in paying installments.
- Provide the motivation to debtors to pay off their debts and pay installments on time.
- Guarantee of certainty based on applicable law.
- There is a right for creditors to get ownership of assets that are used as collateral by the debtor in the event of a default.
Asset Requirements for Collateral
Not all assets can be used as collateral in applying for loans to banks or financing companies. There are three conditions for an asset to be used as collateral, namely:
- Has economic value
- Easily transferable
- Has a juridical value used by creditors in conducting liquidation.
Types of Collateral
Collateral is divided into two types, namely tangible collateral and intangible collateral. The details are explained below.
Tangible collateral is a type of collateral that can be seen by the eye and if possible can be brought by the prospective debtor when applying for a loan. Tangible collateral is divided into two, namely movable collateral and immovable collateral. Examples of movable collateral are motor vehicles and machinery. Meanwhile, examples of immovable collateral are land where a business location is established or a large machine is placed which is used as collateral for prospective debtors when applying for a loan.
Motor vehicle collateral is the most common type of collateral used as collateral when applying for a loan in Indonesia. This type of motorized vehicle can be in the form of cars, motorbikes, and trucks. Usually, banks or financing companies require proof of vehicle ownership such as BPKB, STNK, and purchase invoices.
Keep in mind, that the nominal loan cannot exceed the value of the vehicle. Because the vehicle has a depreciation or a decrease in asset value every year. Usually, the maximum financing value is 85% of the total value of the vehicle.
Motor vehicles also have various loan tenors. If you guarantee the BPKB Motor, the tenor offered is shorter than the BPKB Mobil guarantee.
In this case, BFI Finance as a financing company that has financing products with guarantees requires a loan application with BPKB guarantees for cars and motorbikes. More can be read at the link below.
Information on Application for Car BPKB Guarantee Loans
Information on Application for BPKB Motor Guarantee Loans
Information on Application for Home Certificate Guarantee Loans
Ship or Plane
Who would have thought that large tangible assets can also be used as collateral? Our ships and aircraft that are often used as collateral to meet the business capital needs of large-scale companies. The financing scheme commonly used by large-scale companies is sales and leaseback or business capital financing.
The types of property that can be used as collateral are houses, shop houses, buildings, warehouses, and land. If you make the property as collateral when you apply for a loan, usually the lender will require a certificate of ownership of the property. Considering the high selling value of the property and increasing every year, the amount of the ceiling he received was also greater than other tangible collateral such as cars and motorcycles. The loan ceiling that can be disbursed ranges from tens of millions to billions of rupiah, depending on the needs of the borrower and the feasibility of the property value.
Just like motor vehicle collateral, there are several requirements for your property collateral to be accepted as collateral for financing. For example, being in an area that has easy road access, not close to Menara Sutet, houses that are livable, and so on.
The tenor offered for financing with a home certificate guarantee also tends to be longer than that of a motor vehicle guarantee. The tenor that can be accepted by the debtor can reach tens of years.
Other immovable assets that can be used as collateral are precious metals. The most common type of precious metal used as collateral is gold. Usually, people pledge gold precious metals to government-owned pawnshops. If you pawn gold jewelry, the estimated loan ceiling amount is 70% to 80% of the actual value of the item. Because, what is used as an assessment is only from the weight of the gold, not from the design of the jewelry.
Factory machinery is a type of large tangible asset other than aircraft that can be used as collateral. Debtors who use factory machinery as collateral generally come from large-scale companies. The goal is none other than a means of increasing business capital so that their business continues to run. The creditor or in this case the bank, assesses the feasibility of the factory machine from the health and age of the machine. The maximum financing limit that can be financed by creditors with factory machinery as collateral is generally IDR 5 billion.
Farm and Livestock Products
Types of collateral for garden and livestock products are used by rural communities if they want to apply for financing. Usually, the type of collateral that creditors often receive is high-quality coffee. As for the guarantee of livestock yields, which are often used by prospective debtors, cattle are cattle. The types of cows that can be used as collateral usually come from female cows, pregnant cows, and cows ready to become pregnant, because these types of cattle are still classified as productive.
People who apply for livestock business credit can use the proceeds of the loan for cattle feed, stables, or consumptive financing purposes.
Financing with invoice guarantees or invoice financing is included in the next immovable collateral. Invoice financing is included in short-term financing that guarantees invoices or bills that have not been paid by the customer. While waiting for payment from the customer, loan funds from invoice financing can be used for the company's operational needs, such as paying salaries for production activities.
In addition to invoice financing, debtors from large companies can use company assets in the form of company inventory for short-term financing. This financing activity is called inventory financing. The creditor will usually assess a maximum of 50% of the total value of the inventory to be disbursed as a loan. The nominal is of course obtained after going through feasibility analysis, credit risk, and the profile of the prospective debtor.
Purchase Order/SPK/Contract Letter
In a business cooperation agreement, usually, each party will issue a Cooperation Agreement, Purchase Order, or Contract Letter. The three types of proof of cooperation agreement can be used as immovable collateral for debtors when applying for loans. Of course, getting approval requires a rigorous feasibility analysis process.
In contrast to tangible collateral, intangible collateral is an intangible and economic asset that is used as collateral when applying for a loan or financing. Examples of this intangible collateral are Deposits, Securities, Bonds, Intellectual Property Rights, and so on.
Well, that's the explanation of what collateral is and the types and conditions so that an asset can be used as collateral. It can be said, credit or financing with collateral is an alternative for those of you who want to get a loan with a lower interest rate and higher ceiling compared to credit without collateral. Keep in mind, always plan carefully and clearly your loan needs. This aims to prevent debtors from defaulting. If in a condition that requires the debtor to default, the creditor has the right to get ownership of the asset used as collateral.
Always remember, if you want to apply for financing with collateral, then BFI Finance is the solution! It's enough to guarantee a car, motorbike, or house certificate as BPKB, you have the opportunity to get various loan ceilings and tenors, as well as low-interest rates! Apply right away!