Short-term debt jeopardizes the financial health of Brazilians, leading to bad debt. The commitment of income per citizen with payment of high interest and amortizations – fuel for bad debts – in Brazil is twice the average of developed countries. And the solution is in a modality that is still little explored, but with great potential for expansion in the country: the Secured Loan with guarantee.

A survey by the Institute for Applied Economic Research (IPEA) , with the support of data from the Bank for International Settlements (BIS) reveals that 19.8% of Brazilian income goes to pay off debts and interest, while the average of 17 countries evaluated – among them the United States, Canada, Japan and Australia – is 10%. In the US, by the way, the loan with guarantee for payments for studies and medical emergencies is very common.

“For a long time here in Brazil, he ( credit with guarantee ) was not expressive. In the North American market, it is quite representative. We’ve always had the product, but even because of a peculiarity of our modus operandi and because it is complex, the (bank) managers didn’t have the expertise, so you didn’t have access to this alternative”, says Bruno Diniz, finance professor at Fundação Getúlio Vargas (FGV-SP).

According to the Central Bank, the overdraft , revolving credit card and personal credit are among the debts that most harm the financial health of Brazilians. In these systems without creditor guarantees, the transaction risk increases for the financial institution that will release the money. This is the key factor so that the interest rate charged on the installments is very high and that the term for repaying the debt is shorter. When the modality is the secured loan , however, this risk decreases and conditions improve, making the debt longer and cheaper.

In the case of Creditas loan fintech, for example, the annual interest rate on the loan is 16.09% for transactions involving a property as collateral, and 29.08% when an automobile is used in the process. The annual rate for payroll-deductible loans to workers in the private sector, for example, is fixed at 37.52%. In the personal loan, interest reaches 116.45%. For those who use the overdraft, the annual interest charge reaches an exorbitant 315.58% on credit.

Secured loan: how it works

The main factor that allows the secured loan to become a good option for the consumer is an operation called fiduciary sale. The client, who has a property, car or any other asset that fits as collateral, submits him to this process. In the end, the asset of the person who intends to take the credit is alienated from the financial institution that will lend the money. This makes it possible to reduce the risk of non-payment of the loan and, consequently, to reduce interest rates and extend the payment term of the loan .

However, the ownership and property of the client remain preserved, contrary to the myth that the institution wants to ‘take the good’ of those seeking credit. The guarantee recovery process starts only after the client defaults – and all debt renegotiation alternatives have been exhausted. “The customer continues to have direct ownership and we now have indirect ownership. So he continues to use the property – car or house – and ownership remains his”, explains Felipe Leite, leader of the credit area for real estate at Creditas.

The path to be taken by the client until receiving the money starts with an interview, in which the company’s commercial consultant chats to get to know the person’s profile, understand the purpose of the search for credit, what sources of income they have and other general information. Once approved, the credit sector takes action to analyze the client’s financial situation with institutions such as credit bureaus and the Central Bank. The next step is the legal analysis of the guarantee being placed on the transaction. Then comes the stage of issuing the contract and signing. Finally, there is the release of money.

Secured credit and financial health

Before engaging in secured loan, the consumer must make an in-depth analysis of their finances or seek professional help to do so. The credit leader for real estate at Creditas, Felipe Leite, recommends the modality for those who need to return to financial health, replacing short-term debts, but more expensive, with a single longer and cheaper one.

“We pay off all that person’s debts, lengthen the term of the operation and the commitment of their income decreases a lot. Once we manage to pay off that person’s debts, we relieve their cash flow”, explains Leite.

For the finance professor at FGV/SP, Bruno Diniz, financial education should be the first benefit to be sought by the client after getting rid of bad debt, thus avoiding a new ‘snowball’ of debt and a request for help for credit – which may no longer be available in a new time of need.

“He needs to rethink the next steps in his financial life and get his house in order. I think it’s a big point. From there, she can start to discipline herself more and not fall into traps with more expensive costs”, says Diniz.

Loan with guarantee to pay off the financing

In addition to being good for people with debts that compromise the budget more than is tolerable, the secured loan is also an option for those who are financing a property, car or any other asset that is involved in the operation and use it as a warranty itself.

In this operation, the financing will be paid by the company that will provide the credit and it will have the right to dispose of the asset, but ownership will remain with the client. This process is called the Quitant Intervener (IQ) .

“It’s okay for a person to offer the property as collateral with a debit balance on it. Assuming she has a property worth 100,000 reais and I can lend up to 60% of that amount to her. The outstanding balance is 20%. I can pay off her debt and still give her change to pay off any other debt or even renovate the property”, exemplifies Felipe Leite, from Creditas’ credit area.

The Debtor Intervenent is also very sought after, especially when a person wants to sell a property or vehicle with financing still in progress. Furthermore, it is an alternative if the client is going to buy a new property, for example, but does not want to close a deal with the bank that financed the project.

low default

As a result of bad debt, default affected 62.6 million Brazilians in 2018 , according to data from the National Confederation of Store Managers (CNDL) and the Credit Protection System (SPC Brasil) . And the reasons why citizens became more indebted were the banks (51.57%).

Unwanted status as a bad debtor is a very low risk in secured loan transactions. In extreme situations where the customer defaults, contact attempts are made to understand why. If the person is not found within the time determined by the institution’s policy or declares that he cannot pay off the debt, the filing process is started, which culminates in the repossession of the property.

“This modality benefits a lot of people, so the default is better than the market average. And the objective of those who are lending is never to take your well. We don’t want to be a real estate agency and we don’t want to be a car dealership”, says the Vice President of Business Development at Creditas, Fábio Zveibil.

Loan with guarantee: growing modality

A reality in several countries, secured loans are gaining more and more strength and exposure in Brazil and the room for growth is enormous.

The Vice President of Business Development at Creditas, Fábio Zveibil, justifies that the model is sustainable for individuals as it is already consolidated in the business environment, where “much of the credit is guaranteed Secured Loan  and there are several types, from property to vehicle , but also land, warehouse, shed”.

Also according to the executive, the good growth projection in the country is also based on the total value of the assets – in this case real estate and automobiles – capable of being used in the loan operation. “The potential is huge for the sport as a whole. When you take the value of people’s cars and houses, for example, we have more than 10 trillion reais in potential”, says Fábio Zveibil.

Positive record: presidential sanction

Other than that, there is still a good expectation about the possible sanction of President Jair Bolsonaro (PSL) for the Complementary Law Project (PLP) 441/2017, which makes automatic the inclusion of all individuals and legal entities in the Positive Registry . “People who have a restriction in their name because of a silly thing – electricity bills that they forgot to pay, disputes over improper charges, etc. -, we’ll be able to find out. You’ll be giving the institution, fintech , the opportunity to learn about the client’s financial life beyond just a single note”, says Fábio Zveibil.

With few layers in the market offering the product, the consumer’s search for companies that offer the loan with guarantee must be guided by transparency and by the total amount that the person will pay at the end of the payment of the installments. Often, the lack of information ends up preventing the consumer from making the right choice.

“One point to be noted is the total effective cost of the operation, which does not only consider the interest rate. A lot of customers are just because of that. Suddenly he is not considering the costs of monthly insurance, administrative fees and all that reflects”, ponders Felipe Leite, credit leader for real estate at Creditas.

The expert also warns of possible fraud that can be applied to the consumer. With little knowledge, the chance of being hooked by malicious companies is great. “I think it’s cool to research and consult Reclame Aqui. Also doubt any financial consultancy that will charge you, at first, a fee for that. The idea is to provide financial support and not decapitalize the person in the beginning”, says Felipe Leite.