What is credit improvement?

In the financial point of view, the improvement of loans is the use of a risk reduction technique to protect the investor from losses in a basic security or debt tool. From the banking point of view, the improvement of loans is any technician used to improve the security assessment or bond supported by an asset for improving marketability. These methods are often used to finance a public and private project and as an integral part of structured financing.

There are a number of legitimate methods that can increase the financial stability of the debt tool. One method is excessive collateralization. Collateral is a property that is bound as a security for debt. A common example is a mortgage. If a person fails on a loan, the mortgage holder has the right to entertain the property as a loan repayment through the market closure process.

If the company wishes to issue bonds or somehowFor another form of Debt tool, it can promise assets owned as a collateral for debt. Usually the promised assets would be equal to the amount to be borrowed. If the company wishes to improve the rating of the loan of its bonds or notes, it can promise assets with a higher value than the amount of the obligation. For example, if a company wants to issue bonds for $ 250,000 in the US (USD) and undertakes assets worth $ 275,000, it uses the technique of excessive loan improvements. The risk to the investor is significantly reduced, because in the event of a failure, more than sufficient assets are bound to repay the debt.

Another technique of credit enhancement is to use special insurance contracts or bank accreditations. These principles or letters guarantee a complete repayment of the debt instrument in the event of a failure of the issuer. Insurance contracts are commonly used for projects funded from municipal bonds. The cost of obtaining insurance or accreditation result is a somewhat reduced return on bonds, yet they are muchmore walkable due to a lower risk transmitted by the investor.

The loan enhancement is an integral part of securitization, a form of structured financing that changes non -interior assets to more liquid security. The most common are securities supported by a mortgage (MBS) or securities based on assets (ABS). Together they combine a number of financial assets such as mortgages, bonds, debt tools, credit interconnected notes or lease receivables or credit card obligations. Bonds are issued to investors on a group of assets and the income of these assets pay bonds.

MBS or ABS credit rating is increased by issuing subordinate bonds. Subordination is a graded classification method defining which debts will be paid first and which will be paid last. Those bonds that will be paid first are called senior bonds and have a higher credit rating because they have less risk of income flow. Junior bonds thatThey are the last to be paid, are subordinated to higher bonds. They will have a lower credit rating because they carry a greater risk.

The use of structured funding is not permitted in many countries that are based on civil law and do not have the laws of trust. This is true in many Latin American countries. However, some of the businesses in these countries use this method to increase capital for the development and development of projects. In these areas, the process must be processed at sea.

There are a number of companies that also offer credit improvements to individual consumers. While some of the techniques used by these companies are legitimate, the consumer should be very careful. Some companies "improve" credit rating simply by adding a person's name to a credit card account owned by a non -related party to an excellent credit. If this is happening, it simply helps someone to qualify for a loan that he should not qualify for his own, practice could be afterVoible as fraudulent according to some banking laws.

IN OTHER LANGUAGES

Was this article helpful? Thanks for the feedback Thanks for the feedback

How can we help? How can we help?