Introduction

This report is based on an examination of statements that the lending institution must take
into account before making a loan to the borrower.; these are statements which claims that
stands as a universally entrenched lending philosophy, or stance, that: "... A lender has to be
satisfied that the cannons of good lending apply favorably, without there being any security
consideration as conditional to agreeing to lend..." and local banks' CRM at H/Oto sanction
credit facilities in the form of, for example: "...Approved, subject to security being in place,
or substantially in place...". The report will explain the meaning of the assertions, the pros
and cons of each statement, and the writers' viewpoints on the subject, followed by reasoning
for the stance.

Meaning of statement 1: A lender has to be satisfied that the cannons of good lending
apply favorably, without there being any security consideration as conditional to agreeing
to lend..."

The statement demonstrates that lending money should not be based solely on the borrower's
security; collateral should not prevent a lender from providing money to a borrower if the
borrower meets the principles of good lending cannons .

According to Choi, (2018), The lending canons are the general norms or concepts that banks
would accept during money lending. The cannons are judged based on the borrower's
character; the borrower must be reasonable and dependable in order to repay the loan.
Capacity; the applicant must demonstrate how they will repay the loan. Capital; the borrower
must have his own finances before the lender puts his money at risk. The collateral is the
security of the loan objects or properties submitted as the surety for the loan, to be sold upon
loan default, and the conditions are the overall appraisal of the general economic climate and
purpose of the loan. Finally, the borrower should build trust in the borrower if all of the
requirements listed above are met (Choi, 2018)

The statement agrees with the arguments presented, but it does not make the loan lending as
it is much more dependent on the collateral, as the statement uses the word "should not be
conditional" allows the borrowers with the capacity, trust, and capital to loan even if the
collateral is insufficient or not available as the loan requirement.
Meaning of Statement 2: ..." and local banks' CRM at H/Oto sanction credit facilities
in the form of, for example: "...Approved, subject to security being in place, or
substantially in place...".

The cited second sentence now complies with the canons of good borrowing to be, but
without collateral being excluded as a precondition, this indicates that the collateral must be
provided or the loan will not be accepted. The conventional approach requires collateral;
without it, the borrower cannot obtain funds at any cost.

While the statement is in accordance with all of the excellent canons of sound borrowing, it
does not place the collateral as a "optional" rather it is a condition for the loan to be accepted.

Pros and cos of statement one

The notion of borrowing without collateral as a requirement has its advantages and
disadvantages; the following are the advantages and disadvantages of the statement one made
above.

Pros of statement one

Loans without collateral are easier to get than collateral loans since the borrower is not
required to provide collateral, and a lender cannot seize any of the borrower's property if they
default on a loan without collateral unless the lender obtains a court order. Finally, if a
borrower declares bankruptcy, the court may dismiss non-collateral debts, but not collateral
loans. (Dou et al., 2017)

Cos of Statement One

(Chung et al., (2022) argued that because non-collateral loans are riskier for lenders, they
often have higher interest rates than collateral loans, which means the borrower will pay more
over the life of the loan than it would have paid for a comparable collateral loan. Individual
loan instalments become increasingly expensive and difficult to afford as interest rates rise.
Finally, loans without collateral are more difficult to get. If the borrower has a weak or non-
existent credit history, the lender may decline the application. (Chung et al., 2022)

Pros and Cos of statement two.

The second statement highlights the need of collaterals as loan security; this also has benefits
and drawbacks; below are the benefits of borrowing with collateral.
Pros of secured loans

One of the major pros of the collateral loans are lower interest rates since the bank knows it
can keep the borrower's collateral. If banks are certain that their investment is secure, they
will lend money at lower interest rates (Brown et al., 2012). Naturally, this results in simpler
payments and a less overall impact on the borrower's personal budget.

According to Vaicondam & Wen, (2020). another benefit of collateral loans is flexible
repayment terms, which eliminate the need for the borrower to worry about fines and fees on
settlement payments, pre-closing borrower loans, which result in a single large payment that
significantly reduces borrower capital, and tax-deductible interest on collateral loans, which
allows the borrower to save more money that would otherwise be lost to taxes. (Vaicondam
& Wen, 2020)

Last but not least, Rithaa et al., (2019) further agrees that the collateral loan's minimum
income requirement is far lower than it is for unsecured loans because this is another sign of
the borrower's capacity to repay. Since the borrower effectively paid them off by providing
an asset as security, the borrower's capacity to repay is no longer a relevant consideration
(Rithaa et al., 2019).

Cons of secured loans

Secured loans provide a number of benefits, but they also have several drawbacks, including:

Collateral seizure - The bank/lender will not hesitate to confiscate all assets that the borrower
has pledged as collateral, even if it authorises a bigger loan amount and a lower rate of
interest. must be just as eager to part with the pledged property as the borrower is to accept
the loan (Ryu & Kim, 2021).

Another drawback of collateral loans is their extensive documentation requirements.

Borrowers who take out secured loans must submit several documents, including verification
of identification, age, and residence in addition to those proving their ownership of certain
assets. will also need to sign other of paperwork with sample signatures, and if even one of
those signatures doesn't match the others, they will need to repeat the entire laborious
procedure.
Living in debt is the final outcome of the collateral loan: If the borrower is unable to repay
the loan even after the lender has confiscated their possessions, they will be doomed to a life
where they must use all of their earnings to settle their debt.

Personal Position on the collateral and non collateral loans in regards to above two
statements.

To begin, I would like to favor statement two; so, as part of proper lending practice, collateral
must still be stressed and should be a prerequisite for lending money; since the lender is in
business, risks connected with borrowing must be reduced at all costs.

Justification

Collateral is a valuable item that a borrower can pledge to a lender in order to get a loan or
line of credit; prominent types of collateral include real estate, automobiles, cash, and
investments. Not only can collateral reduce the risk that lenders face since it secures the
credit, but it may also assist borrowers obtain cheaper interest rates and larger loan amounts.

Also Defaulting on any form of borrower loan, especially one without collateral, will have an
impact on the borrower's credit rating. Though a bankruptcy court may discharge a non-
collateral loan, it will not dismiss it if the creditor has already acquired a judgement against
the borrower. Some lenders may offer partly secured loans, which are secured with collateral
worth less than the whole amount of the debt.

Conclusion:

After considering the pros and cons of each statement, the report has recommended the
collateral-based loan, since it provides security to the lenders who are in business and also the
lenders enjoy lower rates.

References