Collateralization

What is 'Collateralization'

Collateralization is the act where a borrower pledges an asset as recourse to the lender in the event that the borrower defaults on the initial loan. Collateralization of assets gives lenders a sufficient level of reassurance against default risk, which allows loans to be issued to individuals/companies with less than optimal credit history/debt rating.

BREAKING DOWN 'Collateralization'

Mortgage financing allows borrowers to hold title over their own home despite acquiring it via borrowed funds. However, in the terms of the mortgage, if the borrowers default on the mortgage payments, the lender has a right to sell the property to recoup the loan amount.

Businesses can use collateralization for debt offerings. Such bonds may go into details as to the specific asset, such as equipment and/or property that is being pledged for the repayment of the bond offering in the event of default. The increased level of security offered to a bondholder typically means that the coupon rate offered on the bond will be lower as well.

RELATED TERMS
  1. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  2. Security Agreement

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  3. Full Recourse Debt

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  4. Secured Note

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  5. Additional Collateral

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  6. Recourse Loan

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    Borrowers are in default when they don’t honor a debt, whether their failure is intentional or not.
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RELATED FAQS
  1. 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 >>
  2. What is the most important "C" in the Five Cs of Credit?

    Learn how the five C's of credit affect new credit application decisions, and understand how a lender analyzes each aspect ... Read Answer >>
  3. 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 >>
  4. Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?

    Learn the five Cs of credit, why they are important and how banks use them to understand and mitigate risks when making loans ... Read Answer >>
  5. Do all banks use the Five Cs of Credit when evaluating potential borrowers?

    Understand how lenders analyze a new credit application from a borrower, and learn why the five Cs of credit are an important ... Read Answer >>
  6. 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 >>
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