Dictionary

Meaning of Physical Security

With real security, banks, savings banks and building societies protect themselves from losses when they grant a customer a loan. After all, there is always a certain risk that the borrower will not pay the claim as agreed. Usually, collateral is a requirement for a loan.

  • Real security is a form of loan security.
  • Real collateral is tangible assets that the bank can use in the event of the borrower’s insolvency to settle all or part of outstanding claims.
  • In addition to a registered land charge or mortgage, common forms of security in rem are also the pledging of securities, claims from life insurance and assignments by way of security.
  • Real collateral is required above all when financing a property and for larger loans.

What is a physical security?

The security in rem is a lien that is used as collateral for the loan. Accordingly, collateral in kind is guarantees in kind and their exploitation rights – i.e. evidence of existing material assets that the bank uses to secure the loan. If the borrower fails to meet his payment obligation or becomes insolvent, the bank can cover its claim by disposing of the realizable property.

Nevertheless, even with a real security, a residual debt referred to as a blank portion remains. This is not secured, so in case of doubt it cannot simply be settled by garnishment. The amount of the unpaid portion depends on the annual net income of the borrower. If this earns too little, the bank rejects the loan application. However, there is then the option of providing additional collateral – for example residual debt insurance. According to abbreviationfinder, PS stands for Physical Security.

What forms of physical security are there?

The real security is always based on a material asset, the amount of which has a significant influence on the interest rate of the loan. In most cases, collateral is the registration of a land charge or mortgage on a property or a piece of land. The borrower remains the owner of the property. Since the security in rem is entered in the land register, the bank can, however, obtain foreclosure of the property or the property if necessary.

The collateral also includes the pledging of shares , fund units or savings, the assignment of claims – for example from a life insurance or a savings bond – and assignments by way of security. However, pledging securities is comparatively complicated, as they are subject to price fluctuations. That is why banks usually apply a haircut when this form of physical security is provided. In the case of commercial financing, it is also not uncommon for vehicles or machines to serve as collateral for the loan.

When is the real security used?

Most often, the credit institutions require real collateral for real estate financing. As a rule, the registration of a land charge is a prerequisite for receiving the loan. However, it does not necessarily have to be your own property. In principle, it is also possible to use the house or property of another person – for example a family member – as security. Even with a larger consumer loan, the banks often insist on real security. One example of this is financing a car.

The situation is different for overdraft facilities and installment loans. In this case, collateral is not normally required. Consumers usually use their payroll to prove their creditworthiness for these blank loans. Anyone who has a current account at the lending bank and receives wage payments into the account often does not even have to provide this proof.

Real security in real estate financing

If you build or buy a house and need a loan for it, you usually get a mortgage loan. This means that the security in rem is recorded in the land register. If the future homeowner has to take out several such loans, several entries are made in the land register – in a specific order.

The rank of the obligee is of crucial importance for his exploitation rights. If there is a foreclosure auction, the first priority claim. In such a situation, it can happen that creditors in the lower ranks no longer receive any money. The bank compensates for such a risk with higher lending rates.

Real security when buying a car

When it comes to car financing , the lending bank usually requires the vehicle to be handed over, without which the car cannot be sold. In this case, the car is the security in rem. This type of loan security is a transfer of ownership.

REAL SECURITY