Collateral security

Collateral is a method by which a creditor or lender can protect itself against losses on a loan or other financial obligation to a debtor or borrower.

Fortunately, in Denmark there are many ways to obtain security for a loan, of which mortgages are probably the most common. With a mortgage, a bank or mortgage company registers a right in connection with the borrowing of a loan, e.g. over real estate or a car.

This article focuses on the most common forms of collateral that traders and banks typically use.

Types of collateral

There are many different types of collateral, but here we focus on the most common ones, especially those related to loans, buying and selling and debt default.

The most common types of collateral in Denmark include surety, pledge, deposit and attachment. It's important to note that there are also specific types of collateral adapted to certain industries and situations, such as family reunification, construction and the environment, which we won't go into here.

Bond as collateral

Surety means that a third party, which can be a person or company outside the lender-borrower relationship, guarantees the loan. This could be, for example, a parent guaranteeing their child's loan.

By providing a guarantee, the guarantor makes a commitment to the creditor or lender that the loan will be paid.

Technically, this means that if the debtor does not pay his debt, the creditor can make a claim against the guarantor.

Pledge as collateral

A mortgage gives the lender a security interest in the debtor's tangible or intangible assets. This could be, for example, a bank taking a mortgage on a property as collateral for a loan.

Mortgages come in several forms, such as sub-mortgages on real estate, where the mortgage is only registered and the mortgagee does not physically control the asset.

A pledge is another form of mortgage where the creditor physically possesses an asset for all or part of the term of the loan. This can be a mortgage on movable assets such as art or luxury watches.

Mortgages and their priority can be viewed at Tinglysning.dk.

Outlays as collateral

Attachments are similar to mortgages, but differ in that they are typically used in debt collection cases where there is a default on payments.

Attachments are made with the assistance of the bailiff court during a judicial debt collection process and can include valuables that exceed what is considered necessary for a simple home, such as cars, property, art and luxury watches.

A creditor can have both a mortgage and an attachment on the same property if, for example, a loan is not paid on time.

Information about real estate attachments and their priority can also be found at Tinglysning.dk.