Are you looking into securing a loan? Do you know what can be used as collateral for loans in South Africa? Find out!
Securing a loan can be a crucial to help you out achieving your goals, whether it’s consolidating debt, funding a dream renovation, or jumpstarting a business venture. But for borrowers with limited credit history or those seeking larger loan amounts, lenders may require collateral for loans, so if you live in South Africa find out what can be used for it.
Let’s talk about what exactly a collateral is, what types of assets qualify, and how it can benefit both borrowers and lenders. That way you can make an informed decision when it comes to your finances. Also, if you want to check out more financial tips on our website, you can click on this link!
What Is Collateral?
It is an asset that you pledge as security for the borrowed money. It acts as a guarantee for the lender. If you, the borrower, are unable to repay the loan according to the agreed terms, the lender has the right to seize and sell the collateral to recoup their losses.
Keep in mind that, lenders may require the collateral to be valued by a professional appraise to make sure the value of it should be sufficient to cover the loan amount. The easier it is for the lender to sell your collateral to recoup their losses, the more likely they are to accept it. The collateral must be free of any existing debt and be entirely owned by the borrower.
What Can Be Used as Collateral for Loans in South Africa?
Essentially, anything of value that can be easily converted into cash can be considered collateral. However, the ease and speed of liquidation are crucial factors lenders consider. Here are some types of collateral typically accepted in South Africa:
- Property: this is the most common form of collateral, especially for home loans. Your house or land serves as security for the loan;
- Vehicles: cars, motorcycles, and even boats can be used as collateral, particularly for auto loans;
- Financial Assets: cash in a savings account, stocks, unit trusts, bonds, and even life insurance policies with a cash surrender value can be used as collateral, especially for business loans;
- Luxury Assets: depending on the lender, valuable items like jewellery, precious metals (gold, diamonds), artwork, antiques, and even designer handbags can be used as collateral, particularly for personal loans.
The type of loan you apply for will influence the type of collateral a lender might accept, for instance:
- Home Loans: the property you’re purchasing will almost always be the collateral;
- Vehicle Loans: when financing a car, motorbike, or boat, the vehicle itself becomes the collateral;
- Business Loans: lenders might consider a combination of assets, including inventory, machinery, receivables (outstanding customer invoices), or even shares in the company;
- Personal Loans: banks might accept traditional assets like vehicles or savings accounts, while alternative lenders might consider a wider range of valuables like jewellery or artwork.
Tips
- A lower LTV ratio (meaning the collateral is worth more than the loan) is more favourable for borrowers and may lead to better loan terms;
- Different lenders have varying requirements for collateral. Compare options to find the best fit for your needs;
- If you default on the loan, you could lose your collateral;
- Ensure your vehicle is properly insured or your valuables are appraised regularly;
- If you’re unsure about using collateral or have complex financial situations, consult a financial advisor.