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Collateral (finance)

 

 
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Collateral (finance)
 
 
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In lending agreements
Loan agreement

A loan agreement is a contract entered into between which regulates the terms of a loan. Loan agreements usually relate to loans of cash, but market specific contracts are also used to regulate securities lending....
, collateral is a borrower's
Borrower

In finance, a Borrower is the party in a loan agreement which receives money or other instrument from a lender and promises to repay the lender in a specified time....
 pledge
Pledge (law)

A pledge is a bailment or deposit of personal property to a creditor to secure repayment for some debt or engagement., The term is also used to denote the property which constitutes the security....
 of specific property
Property

Property is any physical or virtual entity that is ownership by an individual or jointly by a group of individuals. An owner of property has the right to consumption, sell, Renting, mortgage, transfer and exchange his or her property....
 to a lender, to secure
Secured loan

A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan....
 repayment of a loan. The collateral serves as protection for a lender against a borrower's risk
Risk

Risk is a concept that denotes the precise probability of specific eventualities. Technically, the notion of risk is independent from the notion of value and, as such, eventualities may have both beneficial and adverse consequences....
 of default
Default (finance)

In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract....
 - that is, any borrower failing to pay the principal and interest
Interest

Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money , or, money earned by deposited funds .Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft finance, and even entire factories in finance lease arrangements....
 under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency
Insolvency

Insolvency means the inability to pay one's debts as they fall due.This is defined in two different ways:Cash flow insolvency -: Unable to pay debts as they fall due....
 or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral.






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In lending agreements
Loan agreement

A loan agreement is a contract entered into between which regulates the terms of a loan. Loan agreements usually relate to loans of cash, but market specific contracts are also used to regulate securities lending....
, collateral is a borrower's
Borrower

In finance, a Borrower is the party in a loan agreement which receives money or other instrument from a lender and promises to repay the lender in a specified time....
 pledge
Pledge (law)

A pledge is a bailment or deposit of personal property to a creditor to secure repayment for some debt or engagement., The term is also used to denote the property which constitutes the security....
 of specific property
Property

Property is any physical or virtual entity that is ownership by an individual or jointly by a group of individuals. An owner of property has the right to consumption, sell, Renting, mortgage, transfer and exchange his or her property....
 to a lender, to secure
Secured loan

A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan....
 repayment of a loan. The collateral serves as protection for a lender against a borrower's risk
Risk

Risk is a concept that denotes the precise probability of specific eventualities. Technically, the notion of risk is independent from the notion of value and, as such, eventualities may have both beneficial and adverse consequences....
 of default
Default (finance)

In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract....
 - that is, any borrower failing to pay the principal and interest
Interest

Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money , or, money earned by deposited funds .Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft finance, and even entire factories in finance lease arrangements....
 under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency
Insolvency

Insolvency means the inability to pay one's debts as they fall due.This is defined in two different ways:Cash flow insolvency -: Unable to pay debts as they fall due....
 or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral. In a typical mortgage loan
Mortgage loan

A mortgage loan is a loan secured by real property through the use of a note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which security interest the loan....
 transaction, for instance, the real estate
Real estate

Real estate is a law term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location. 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
Bank

A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
. The bank uses a legal process
Legal Process

The legal process school was a movement within American law that attempted to chart a third way between legal formalism and legal realism. Drawing its name from Hart & Sacks' textbook The Legal Process , it is associated with scholars such as Herbert Wechsler, Henry Hart, Albert Sacks and Lon Fuller, and their students such as John Hart Ely...
 called foreclosure
Foreclosure

Foreclosure is the legal and professional proceeding in which a Mortgage#Mortgage lender, or other lienholder, usually a lender, obtains a court ordered termination of a Mortgage#Borrower's equity right of Redemption_value....
 to obtain real estate from a borrower who defaults on a mortgage loan obligation.

Concept of collateral

Collateral, especially within banking, may traditionally refer to secured lending
Secured loan

A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan....
 (also known as asset-based lending
Asset-based lending

In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken....
). More recently, complex collateralisation arrangements are used to secure trade transactions (also known as capital market collateralization). The former often presents unilateral obligations, secured in the form of property
Property

Property is any physical or virtual entity that is ownership by an individual or jointly by a group of individuals. An owner of property has the right to consumption, sell, Renting, mortgage, transfer and exchange his or her property....
, surety
Surety

A surety is a person who agrees to be responsible for the debt or obligation of another. Furthermore, a surety is also a "security against loss or damage or for the fulfillment of an obligation, the payment of a debt, etc.; a pledge, guaranty, or bond."...
, guarantee or other as collateral (originally denoted by the term security), whereas the latter often presents bilateral obligations secured by more liquid assets such as cash
Cash

Cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, "cash" refers to current assets comprised of currency or currency equivalents that can be accessed immediately or near-immediately ....
 or securities
Security (finance)

A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities , and stock securities; e.g., common stocks....
, often known as margin
Margin (finance)

In finance, a margin is collateral that the holder of a position in security , Option , or futures contracts has to deposit to cover the credit risk of his counterparty ....
. Another example might be to ask for collateral in exchange for holding something of value until it is returned (e.g., I'll hold onto your wallet while you borrow my cell phone).

In many developing countries, the use of collateral is the main way to secure bank financing. The ease of acquiring a loan depends on the ability to use assets, whether real estate or any other; as collateral.

See also

  • Security interest
    Security interest

    A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt....
  • Credit risk
    Credit risk

    Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit ...
  • Hypothecation
    Hypothecation

    Generally, in English and American law, a contract of mortgage or pledge as Collateral for a debt in which the subject matter is not delivered into the possession of the pledgee or pawnee....
  • Cross-collateralization
    Cross-collateralization

    Cross-collateralization is a term used when the Collateral for one loan is also used as collateral for another loan. If a person has borrowed from the same bank a home loan secured by the house, a car loan secured by the car, and so on, these assets can be used as cross-collaterals for all the loans....