Under a lending agreement, the collateral is the borrower's promise of a particular property to the lender, to guarantee the repayment of the loan. Guarantee serves as lender protection against borrower's standards so that it can be used to offset the loan if the borrower fails to pay the principal and interest satisfactorily under the terms of the loan agreement.
The protection provided by the guarantee generally allows the lender to offer a lower interest rate on a loan that has collateral compared to them without collateral because the risk of loss to the lender is lower. Interest rate reductions can be up to several percentage points, depending on the type and value of the collateral. For example, the interest rate (APR) on unsecured loans is often much higher than for secured loans or note book loans, as the risks for lenders then increase.
If the borrower fails in the loan (due to bankruptcy or other events), the borrower loses the property as collateral, with the creditor then becomes the owner of the property. In ordinary mortgage lending transactions, for example, real estate obtained with the help of a loan serves as collateral. If the buyer fails to repay the loan in accordance with the mortgage agreement, the lender may use the legal seizure process to obtain the ownership of the real estate. Pawnshops are a common example of a business that can accept assorted goods as collateral.
This type of collateral may be limited based on the type of loan (such as car loans and mortgages); it can also be flexible, as in the case of personal loans based on collateral.
Video Collateral (finance)
The concept of collateral
Warranties, especially in banking, traditionally refer to secured loans (also known as asset-based loans). More complex col- lization arrangements can be used to secure trade transactions (also known as capital market collateralization). The former often presents unilateral obligations guaranteed in the form of property, warranties, guarantees or other guarantees (originally denoted by the term security ), while the latter often presents bilateral obligations secured by more liquid assets such as cash or securities, often known as margins.
Maps Collateral (finance)
Valuable warranty
Marketable warranties are the exchange of financial assets, such as stocks and bonds, for loans between financial institutions and borrowers. In order to be considered marketable, assets must be able to be sold under normal market conditions with reasonable accuracy at current fair market values. For a national bank to accept borrower loan proposals, the collateral must equal or greater than 100% of the loan amount or credit extension. In the United States, the total loan and credit extension of a bank to a borrower may not exceed 15 percent of the bank's capital and surplus, plus an additional 10 percent of the bank's capital and surplus.
Reduction in the value of collateral is a major risk when securing loans with marketable collateral. The financial institution closely monitors the market value of any retained financial asset as collateral and takes appropriate action if its value falls below the predetermined maximum lending-to-value ratio. The permitted actions are generally specified in the loan agreement or margin agreement.
See also
- Consignment
- Credit Support Appendix
- Cross-collateralization
- Hypothecation
- Security deposit
- Security interest
References
Source of the article : Wikipedia
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