Most preferred type of loan security
When applying for a loan, one of the key requirements from financial institutions is providing security or collateral. Loan security is an asset pledged by the borrower to assure the lender of repayment. In the event that the borrower fails to repay the loan, the lender can seize and sell the asset to recover the funds. Among the various types of loan security, some are more preferred than others due to their reliability, ease of valuation, and legal enforceability. Below we explore most preferred type of loan security.
Real Estate
Real estate, including land and buildings, remains the most preferred type of loan security by banks, SACCOs, and microfinance institutions. Property is considered a stable and appreciating asset that can easily be used to recover funds in case of a loan default. Its clear ownership documentation, such as title deeds, makes it easier for lenders to place legal claims. In Kenya, for instance, lenders commonly place a charge on the land title at the Ministry of Lands, restricting any transaction on the property until the loan is fully repaid.
The popularity of land and property as loan security is also linked to its long-term value. Unlike movable assets that may depreciate or become obsolete, land tends to appreciate in value over time. For this reason, financial institutions are more willing to offer higher loan amounts and longer repayment periods when the borrower pledges land or a house as security.
Logbooks and Motor Vehicles
Motor vehicles come second as a widely accepted form of collateral, especially for personal or asset-based loans. Borrowers can use their car logbooks to access credit, particularly from microfinance institutions that specialize in logbook loans. While not as preferred as real estate, vehicles are still attractive to lenders due to their resale value, provided the car is in good condition and not too old.
However, lenders often apply stricter conditions for logbook loans, such as limiting the age of the car and ensuring full insurance coverage. Since vehicles depreciate over time, the loan amount offered is usually a percentage of the car’s current market value.
Financial Instruments
Fixed deposit accounts, treasury bills, and shares in reputable companies also rank high on the list of preferred loan securities. These assets are considered safe and highly liquid, meaning they can quickly be converted to cash if the borrower defaults. Lenders particularly favor these securities because they require minimal legal processes to access and carry a low risk of loss.
In SACCOs, members’ deposits and shares are commonly used as security for loans. These deposits act as a built-in collateral, allowing members to access credit without external assets. The SACCO may attach a portion or all of a member’s savings until the loan is repaid, ensuring low risk for the institution.
Why Land Remains King
Despite the variety of acceptable securities, land remains the most preferred due to several factors. First, it provides a high level of confidence to the lender because of its enduring market value. Second, its legal documentation allows for straightforward registration of encumbrances such as charges or caveats. Third, land is widely available in both rural and urban areas, making it a practical option for borrowers across all economic sectors.
Additionally, many government and commercial lenders have structured their loan products specifically around land ownership. Agricultural loans, construction loans, and even some education and business loans require land as a prerequisite. The presence of a title deed increases the borrower’s credibility and often results in faster loan approval and better repayment terms.
Author: Andrew Walyaula
Andrew Walyaula is a seasoned multimedia journalist. satrendmagazine@gmail.com
