Advance Rate

What is an 'Advance Rate'

An advance rate is the maximum percentage of the value of a collateral that a lender is willing to extend for a loan. The advance rate helps a borrower determine what kind of collateral to bring to the table in order to secure the desired loan amount, and helps minimize a lender's loss exposure when accepting collateral that can fluctuate in value.

BREAKING DOWN 'Advance Rate'

Collateral helps lenders minimize risks and to offer affordable interest rates to borrowers. By setting an advance rate, a lender can build a cushion into the loan transaction by ensuring that if the value of the collateral drops and the loan goes into default, there is still adequate protection from the loan principal loss. If a lender has an advance rate of 75%, and the value of collateral presented is $100,000, then the maximum loan the borrower can receive is $75,000. Advance rate works similarly to loan-to-value ratio.

RELATED TERMS
  1. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  2. Borrowing Base

    The amount of money a lender will loan to a company based on ...
  3. Cross Collateralization

    The act of using an asset that is currently being used as collateral ...
  4. Non-Recourse Debt

    A type of loan that is secured by collateral, which is usually ...
  5. Security Interest

    A legal claim on collateral that has been pledged, usually to ...
  6. Security Agreement

    A document that provides a lender a security interest in a specified ...
Related Articles
  1. Credit & Loans

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  2. Credit & Loans

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  3. Trading Strategies

    How Does Securities Lending Work?

    Securities lending is the act of loaning a stock or other security to an investor or firm.
  4. Home & Auto

    What Is A Mortgage?

    A mortgage is a loan used to purchase a home, where the property serves as the borrower's collateral.
  5. Investing Basics

    A Primer On Collateralized Debt Obligation (CDOs)

    A collateralized debt obligation, or CDO, is a structured financial product backed by a pool of loans. When a retail or commercial bank approves loans such as mortgages, auto loans or credit ...
  6. Investing

    What is Debt Financing?

    When a company needs to pay for something, it can pay with cash, or it may finance the purchase. Financing means that it gets the money from other businesses or sources, in return for obligations. ...
  7. Credit & Loans

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  8. Credit & Loans

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  9. Personal Finance

    Tips To Improve Chances Of A Small Business Loan

    Enhance your small business loan eligibility by keeping these important tips in mind.
  10. Credit & Loans

    Contrasting Non-Recourse And Recourse Loans

    The difference between a recourse and non-recourse loan involves how aggressively a lender can pursue a borrower who defaults on the loan.
RELATED FAQS
  1. What is the difference between asset-based lending and asset financing?

    In the most common usage, the terms "asset-based lending" and "asset financing" refer to the same thing. Asset-based lending ... Read Answer >>
  2. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  3. What is the difference between secured and unsecured debts?

    Learn the differences between secured and unsecured debt; discover how banks buffer risks associated with each type of loan ... Read Answer >>
  4. When did people first start using collateral to secure loans?

    Read about the history of lending and collateral, including a time when an entire nation was pledged as collateral for all ... Read Answer >>
  5. What is the difference between a non-recourse loan and a recourse loan?

    The essential difference between a recourse and non-recourse loan has to do with which assets a lender can go after if a ... Read Answer >>
  6. What is the difference between a fixed annual percentage rate (APR) and a variable ...

    Fixed ARP and variable APR loans operate differently but serve the same purpose: to collect interest from a borrower so the ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center