Collateralization

AAA

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.

INVESTOPEDIA EXPLAINS '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. Bond

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

    A debt instrument, secured by the collateral of specified real ...
  3. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  4. Borrowing Base

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

    A loan provision which allows the borrower to add additional ...
  6. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
Related Articles
  1. Insurance

    Investing In Securitized Products

    Securitized assets are customizable and have a wide range of yields, making them an attractive asset class.
  2. Home & Auto

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay.
  3. Options & Futures

    Saving Your Home From Foreclosure

    Learn the tactics you can use to prevent your home from being repossessed.
  4. Credit & Loans

    Mortgage Basics

    Learn how to navigate what may be your biggest and most important loan.
  5. Home & Auto

    Save $30,000 For A Home Down Payment In 5 Months

    Before tackling mortgage rates, home maintenance costs and utilities, every home buyer must first gather the funds for a mortgage loan down payment.
  6. Credit & Loans

    Getting A Mortgage When Building Your Own Home

    It's much harder to get a loan when you're building a home, not moving into one. Here's where to look and what to expect.
  7. Credit & Loans

    Understanding Loan-to-Value Ratio

    Loan-to-value ratio (LVR) is a tool used to evaluate the risk in a collateralized loan, usually a mortgage loan.
  8. Credit & Loans

    Surprising Ways A Mortgage Affects A Credit Score

    It takes a good credit score to get favorable mortgage rates. Then, how you pay a mortgage will shape your score – just having one can lower it at first.
  9. Stock Analysis

    Can American Capital Agency Maintain Its Dividend?

    Dividend investors know that real estate investment trusts with REITs that invest in mortgage-backed securities produce double-digit dividend yields.
  10. Stock Analysis

    How Two Harbors' Derivatives Work?

    Mortgage REITs, like Two Harbors , have cut their dividend payments as interest rate trends have eaten into profitability under the business models.

You May Also Like

Hot Definitions
  1. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  3. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  4. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  5. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase ...
Trading Center