Collateral ( finance ) - wikipedia Collateral ( finance ) This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. ( November 2016 ) In lending agreements, collateral is a borrower 's pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as a lender 's protection against a borrower 's default and so can be used to offset the loan if the borrower fails to pay the principal and interest satisfactorily under the terms of the lending agreement. The protection that collateral provides generally allows lenders to offer a lower interest rate on loans that have collateral compared to those without collateral because the risk of loss to the lender is lower. The reduction in interest rate can be up to several percentage points, depending on the type and value of the collateral. For example, the interest rate ( APR ) on an unsecured loan is often much higher than on a secured loan or logbook loan, as the risk for the lender is then increased. If a borrower defaults on a loan ( due to insolvency or another event ), that borrower loses 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. If the buyer fails to repay the loan according to the mortgage agreement, the lender can use the legal process of foreclosure to obtain ownership of the real estate. A pawnbroker is a common example of a business that may accept a wide range of items as collateral. The type of the collateral may be restricted based on the type of the loan ( as is the case with auto loans and mortgages ) ; it also can be flexible, such as in the case of collateral - based personal loans. Contents 1 Concept 2 Marketable collateral 3 See also 4 References Concept 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 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. Marketable collateral Marketable collateral is the exchange of financial assets, such as stocks and bonds, for a loan between a financial institution and borrower. To be deemed marketable, assets must be capable of being sold under normal market conditions with reasonable promptness at current fair market value. For national banks to accept a borrower 's loan proposal, collateral must be equal to or greater than 100 % of the loan or credit extension amount. In the United States of America, the bank 's total outstanding loans and credit extensions to one 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 of collateral value is the primary risk when securing loans with marketable collateral. Financial institutions closely monitor the market value of any financial assets 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 specified in a loan agreement or margin agreement. See also Auto - collateralisation Consignment Credit Support Annex Cross-collateralization Hypothecation Security deposit Security interest References Jump up ^ Garrett, Joan F. ( 1995 ). Banks and Their Customers. Dobbs Ferry, NY : Oceana Publications. p. 99. ISBN 0 - 379 - 11194 - 2. Jump up ^ O'Sullivan, Arthur ; Sheffrin, Steven M. ( 2003 ). Economics : Principles in Action. Upper Saddle River, New Jersey 07458 : Pearson Prentice Hall. p. 513. ISBN 0 - 13 - 063085 - 3. Jump up ^ `` 12 CFR 32.3 - Lending limits ''. LII / Legal Information Institute. Retrieved 2017 - 05 - 10. GND : 4173985 - 1 NDL : 00572678 Retrieved from `` https://en.wikipedia.org/w/index.php?title=Collateral_(finance)&oldid=859921097 '' Categories : Business terms Credit Liability ( financial accounting ) Loans Hidden categories : Articles needing additional references from November 2016 All articles needing additional references Wikipedia articles with GND identifiers Wikipedia articles with NDL identifiers Talk Contents About Wikipedia Deutsch Español Français 한국어 हिन्दी Bahasa Indonesia Italiano עברית Lietuvių Magyar Nederlands 日本 語 Norsk Polski Português Српски / srpski Suomi Svenska తెలుగు ไทย 中文 13 more Edit links This page was last edited on 17 September 2018, at 04 : 39 ( UTC ). Text is available under the Creative Commons Attribution - ShareAlike License ; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia ® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization. About Wikipedia

Question: a loan for which a specific asset is used as collateral or pledged
Answer: secured loan or logbook loan