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.