Financial Terms / collateralCollateral is the key to unlocking a secured loan. It provides a layer of protection for the lender should the borrower fail to fulfill their loan obligations.
What is Collateral?
Collateral is an asset that a borrower pledges as security for a loan. It is used to reduce the risk for lenders, and if a borrower defaults on the loan, the lender can seize the collateral.
What is a Collateralized Loan?
A collateralized loan is a loan that uses an asset as security for repayment of the loan. The asset is referred to as the collateral.
What is the Purpose of Collateral?
The purpose of collateral is to reduce the risk that a lender takes on when issuing a loan. If a borrower defaults on the loan, the lender can seize the collateral to cover the cost of the loan.
Key Points
Collateral Value
Collateral is an asset or group of assets that are used to secure a loan. It's value is used to determine the loan-to-value (LTV) ratio, which is the size of the loan relative to the collateral value.
Estimating Collateral Value
Estimating the collateral value is an important step in the loan process. This can be done by reviewing comparable transactions, relying on tax assessments, and/or consulting with subject-matter experts.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) is the size of a secured loan relative to the collateral value. It is calculated by dividing the loan amount by the collateral value.
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