Table of Contents
Introduction
Lending is inherently risky—you're giving someone money (or maybe a car) on the promise that they'll pay you back. Securing a loan with collateral is one way of mitigating that risk. A collateral item is something that the lender can take and resell if the borrower fails to make payments. For example, most auto loans are secured by the car, and most mortgages are secured by real estate. If the borrower on those loans fails to make payments, the contract stipulates that the lender can repossess the collateral.
In this article, we explain a basic overview on the types of collateral and assigning collateral to a loan. LoanPro's collateral tracking is as efficient as possible. If you're already familiar with how collateral works in LMS, you should skip ahead to Adding Collateral Information, where we show the step-by-step process.
Use Case: Point of Sale Lending
Use Case: Collateral/Point of Sale
The Problem:
A point-of-sale lender wants to track which items their borrowers purchased when they took out their loans. Tracking which collateral is tied to which loan will let them use that information when communicating with borrowers, and could also allow them to gather metrics about which items are most likely to be repaid on time. The only trouble is that on their current, not-LoanPro software, they can only save one collateral item to a loan, and most of their customers are buying multiple items at a time.
LoanPro's Solution:
With LoanPro, you can save multiple collateral items to a single account. Auto lenders can save a truck and a trailer to the same lease, and point-of-sale lenders can bundle a dozen different items together with the same loan, or any other combination of items linked to the same account. These different collateral items can each be used as variables in your custom communication or business logic, and you can use a Custom Query Report to pull information about collateral across all your loans.
How Collateral Works
In LMS, collateral items are saved to individual loans, and a single loan can have multiple collateral items. We should also note that each collateral item has a type, corresponding to the four types of loans in LMS: Auto, Consumer, Real Estate, and Other. Each type of collateral has different settings defaults (covered in the Collateral Fields section below). We anticipate most lenders will use the same type of loan and collateral (e.g., a car securing an auto loan) but you can mix-and-match different types as well. This is especially useful for loans secured by several different collateral items: A single business-to-business loan could be secured with equipment, company vehicles, and inventory.
Collateral Fields
Before adding collateral on an individual loan, you may want to edit the available fields in your company settings. You have the ability to customize and adjust these collateral fields, and these fields store and track information. After you have configured collateral fields, you can set a loan type default for each of the major collateral types using System Defaults. You can also establish Loan Type Specific Defaults based on each of the four main collateral types.
Collateral Information
Once you've configured the settings to your liking, you can enter collateral information for an individual loan. Our article on Adding Collateral Information covers how to do this and the walks you through the step-by-step process in the LMS UI. Additionally, you can use the LoanPro import system to bring in an existing body of collateral data.
However, if you'd like to export collateral information instead, you can most effectively export your data from the system using the Custom Query.
Where Does Collateral Fit?
Whether you secure your loans—and what you secure them with—is a major question for your lending operation. The possibility of repossessing collateral obvious reduces the risk of extending a loan, but it introduces the logistical challenge of tracking information about collateral items, and possibly managing a repossession process. But LoanPro's servicing tools will make it easy to handle all of your collateral items, insurance policies, and the processes surrounding them.
If you plan on securing loans with collateral, we recommend working with our success specialists to configure a processes for adding and repossessing collateral.
This Feature is Not
Let's take a second to clear up any misconceptions about collateral in LMS.
- Collateral is not limited to items you plan to repossess. Although that is one of the main reasons for tracking collateral, some point-of-sale lenders like to use this tool even though they don't repossess the items they finance. Instead, it helps them keep track of why a loan was issued, and the information can be used as context engine variables in customer communication.
- Collateral fields are not limited to automotive information (year, make, and model). You can customize your collateral fields by navigating to Settings > Loan > Labeling > Collateral Fields. Our article Using Collateral Fields explains how.
- Loans aren't limited to a single collateral item. In fact, you can have up to 50 items of collateral on a single loan.
What's Next?
For more information, check out these articles:
- Using Collateral Fields discusses tenant-level labelling options on collateral.
- Add Collateral Information explains how to add information on individual collateral items connected to a loan.
- Insurance shows how to track policies that you have for collateral items.
Written by Andy Morrise
Updated on September 19th, 2023