In banking, collateral refers to objects and claims of the borrower to third parties that are technically deposited or can be used in the context of security transfer. The bank can realize the collateral as soon as the borrower no longer fulfills its obligations under the loan agreement in due time.
Lending without collateral in the technical sense
In terms of banking terminology, almost every consumer loan is basically a loan without collateral, since the borrower does not provide any specific loan collateral. One of the few exceptions is the car loan, in which the financed vehicle is usually assigned as security. The borrower’s regular working income serves as a substitute for possible loan security.
However, it is only a security in the strict sense of the term if the credit agreement provides for wage transfer. Furthermore, the part of the income that exceeds the garnishment-free limit can be assessed as credit security, since the financial institution can access this in the event of failure to pay back. For this reason, financial institutions sometimes refuse to pay the loan if the income is below the garnishment limit, even if the household bill shows that their potential customer can pay the loan installments.
Lending without collateral in colloquial sense
Deviating from the banking language, the colloquial language usually describes a loan as being given without collateral if the borrower is neither able to provide real security, nor can he assign claims and at the same time does not have a regular income from work. According to this definition, lending to people with strongly fluctuating income as well as loan disbursement to employees with multiple employment relationships are each a loan without collateral.
In this case, borrowing without proof of salary is a good idea, with the borrower indicating his average income. Deliberate misrepresentation of the amount of income is not permitted and, if discovered in spite of punctual payment of the credit installments, can lead to the bank terminating the loan. A positive Credit Bureau information increases the chance of obtaining a loan without collateral; in itself, it is less a guarantee of credit than a confirmation that the applicant has duly met his financial obligations in the past.
As an alternative to a loan without collateral from a credit bank, an organized private loan can be taken out via a corresponding internet platform. Many of the private lenders base their decisions more on social criteria and the intended use of the loan than on loan collateral.