DEFINITION of After-Acquired Collateral
After-acquired collateral is collateral for a loan taken by the lender after the borrower has already entered into a loan agreement. The need for it arises when the borrower has insufficient collateral for the loan but may be acquiring additional property in the near term. This property would serve as after-acquired collateral, and would automatically be collateralized.
BREAKING DOWN After-Acquired Collateral
In general, after-acquired collateral is property that a person acquires after taking on a debt, which becomes additional collateral for the debt. Typically, this occurs when the debtor has signed an agreement pledging all property as security for the debt. It can also refer to property acquired by a debtor after filing for bankruptcy or property someone acquires after making a will.
The requirement for after-acquired collateral is generally laid out in the loan agreement. The need may arise if the lending institution requires more collateral than the borrower can put up to have more security for the loan. In this case, the borrower agrees to pledge all future property up to a certain amount as additional collateral for the loan.
After-Acquired Collateral vs. Margin Call
A margin call can be thought of as a type of after-acquired collateral. Margin refers to an investor borrowing money from a broker to make investments. The investor usually places some amount of personal money as collateral. An investor is said to have equity in the investment, which is equal to the market value of securities minus borrowed funds from the broker. A margin call is triggered when the investor's equity as a portion of the total market value of securities falls below a certain percentage. The broker then issues a margin call, or a call for more collateral.
An Example of a Margin Call, or After-Acquired Collateral
Assume an investor buys $1 million of stocks by using $500,000 of his own funds and borrowing the remaining $500,000 from his broker. Now assume that on the second trading day, the value of the purchased securities falls to $600,000 and a margin call is triggered. This results in the investor's equity of $100,000 (the market value of $600,000 minus the borrowed funds of $500,000). However, the investor must maintain at least $150,000 of equity in his account to be eligible for margin, resulting in a $50,000 deficiency. The broker makes a margin call, requiring the investor to deposit at least $50,000 in cash to meet the maintenance margin. This is collateral acquired after the commencement of the loan.