DEFINITION of 'Collateralization'

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.

  1. Coupon

    The annual interest rate paid on a bond, expressed as a percentage ...
  2. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  3. Bond

    A debt investment in which an investor loans money to an entity ...
  4. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  5. Borrowing Base

    The amount of money a lender will loan to a company based on ...
  6. Debt Accordions

    A loan provision which allows the borrower to add additional ...
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    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
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    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  3. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
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