Collateral (nance)

In lending agreements, collateral is a borrowers pledge

of specic property to a lender, to secure repayment of a
loan.[1][2] The collateral serves as protection for a lender
against a borrowers defaultthat is, it can be used to oset the loan to any borrower failing to pay the principal
and interest under the terms of a loan obligation. If a
borrower does default on a loan (due to insolvency or
other event), that borrower forfeits (gives up) the property
pledged as collateral, with the lender then becoming the
owner of the property. In a typical mortgage loan transaction, for instance, the real estate being acquired with
the help of the loan serves as collateral. Should the buyer
fail to pay the loan under the mortgage loan agreement,
the ownership of the real estate is transferred to the bank.
The bank uses the legal process of foreclosure to obtain
real estate from a borrower who defaults on a mortgage
loan obligation. A pawnbroker is an easy and common
example of a business that may accept a wide range of
items as collateral rather than accepting only cash.

of the loan or credit extension amount. The banks total

outstanding loans and credit extensions to one borrower
may not exceed 15 percent of the banks capital and surplus, plus an additional 10 percent of the banks capital
and surplus.
Reduction of collateral value is the primary risk when
securing loans with marketable collateral. Financial institutions closely monitor the market value of any nancial asset held as collateral and take appropriate action if
the value subsequently declines below the predetermined
maximum loan-to-value ratio. The permitted actions are
generally specied in a loan agreement or margin agreement.

3 See also
Consignment
Security deposit

Security interest

Concept of collateral

Credit risk

Collateral, especially within banking, traditionally refers

to secured lending (also known as asset-based lending).
More complex collateralization arrangements may be
used to secure trade transactions (also known as capital
market collateralization). The item that is used as collateral provides security to the lender, to help ensure that
they will get their money back even if the borrower is not
able to satisfactorily repay the loan in full. The former
often presents unilateral obligations secured in the form
of property, surety, guarantee or other collateral (originally denoted by the term security), whereas the latter often presents bilateral obligations secured by more liquid
assets such as cash or securities, often known as margin.

Hypothecation
Cross-collateralization
Pawnbroker
Margin

4 References
[1] Garrett, Joan F. (1995). Banks and Their Customers.
Dobbs Ferry, NY: Oceana Publications. p. 99. ISBN
0-379-11194-2.
[2] O' Sullivan, Arthur; Steven M. Sherin (2003).
Economics: Principles in Action. Upper Saddle River,
New Jersey 07458: Pearson Prentice Hall. p. 513. ISBN
0-13-063085-3.

Marketable collateral

Marketable collateral is the exchange of nancial assets,

such as stocks and bonds, for a loan between a nancial
institution and borrower. To be deemed marketable collateral, assets must be capable of being sold under normal
market conditions with reasonable promptness at current
fair market value. Conditions are based upon transactions in an auction or similarly available bid, or ask price
market. For national banks to accept a borrowers loan
proposal, collateral must be equal or greater than 100%
1

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Collateral (nance) Source: http://en.wikipedia.org/wiki/Collateral%20(finance)?oldid=649433937 Contributors: Ixfd64, Yosri, HaeB,

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