Understanding Collateral in Financial

Commonly, we get know about collateral in credit process. Collateral can be in the form of goods, assets, or marketable securities that serve as collateral provided by debtor to creditor.

In financial, the collateral function is to secure the creditors' receivables so that they will be repaid. For example, the debtor fails to pay off the debt, then we can use the collateral as a debt repayment. The repayment can be done by auctioning or selling collateral, depending on agreement.

However, thru collateral it doesn't make a good credit, because collateral only provides added value in debt repayment. Therefore, collateral is a small part of the analysis of debt disbursement to debtor.

Collateral in conventional credit

Just like creditors who will select the debtor institution, it will same for collateral. You must know what types of the collateral is. Therefore, it's good for us to know the types of collateral, which are:

A. Based on function, the collateral is divided into:

  • Principal collateral. It is an object obtained by credit. For example, when someone buy a house, the collateral is that house. As long as the credit has not been repaid, land deed will be deferred.  

  • Additional collateral. It is the complement of principal collateral. Usually, creditor use this type if the principal collateral is not enough to guarantee the loan amount.

B. Based on object entity

  • Tangible collateral. It is collateral that can be seen clearly, such as car, house, and machines.

  • Intangible collateral. It is a guarantee that can be seen clearly as an object such as company guarantees and individual guarantees, or land deed.

C. Based on movement

  • Movable collateral such as receivables, vehicles, and commodity.

  • On the other hand, immovable collateral is collateral consisting of immovable objects, such as property that used for long-term loans with a mortgage .  

Collateral in Fintech

Commonly, we can get the types of collateral as mentioned above in conventional credit. On the other hand, fintech industry growing fast in Indonesia. It will raise a question about the collateral is. Is it still used for application-based lending?

The rules of technology-based lending or commonly known as Peer to Peer Lending (P2P) scheme are stated in POJK Number 77 / POJK.01 / 2016 concerning Information Technology-Based Lending and Borrowing Services. Furthermore, collateral-based fintech has also obtained business licenses in Indonesia through POJK Number S-280 / NB.213 / 2018 on April 20th, 2018.

Generally speaking, most P2P does not require collateral because the loan amount is not as large as conventional schemes. Besides, P2P provides easier and faster in the administrative process for term and condition.

However, nowadays there are several P2P players who have use to collateral to protect loan process and provide investors certainty. Regarding the type of collateral, it depends on the platform. Some use movable objects such as gold or immovable objects such as personal guarantees or company guarantees like CROWDO currently do.

Platform can also add own additional terms and condition to make differ with another platform. The benefit depends on to borrower's and lender's point of view. Overall with or without collateral, P2P Lending provides velocity, convenience, and shorter tenor period than conventional credit process.