What is Collateral Value
A collateral value is the estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal from a qualified expert.
What Is Collateral?
BREAKING DOWN Collateral Value
Collateral value is often a key determinant in the terms associated with a secured loan. Secured loans are typically made for a specified loan to value amount with the collateral used to secure the loan in case of default.
Secured loans can be made against all types of property. One of the most common types of secured loans is a mortgage loan secured against a home. Other types of property accepted for secured loans may include car title loans, art, jewelry or securities. If publicly traded securities are being used, then the current price of the securities is the collateral value. However, marketable securities are subject to the margin requirement restrictions mandated by the Federal Reserve Board.
Secured loans are structured in a similar way to other mainstream loans. They include a principal amount and require either fixed or variable interest payments. Secured loans however, like their name, are much more secure for the lender. This can also be advantageous for the borrower in obtaining a lower interest rate.
To begin the application process for a secured loan the borrower must first obtain an appraisal with the estimated fair market collateral value of the property to be considered in the loan. Most secured lenders have established loan to value limits which help to determine the amount they are willing to loan.
Borrowers for secured loans must complete the same loan application procedures as other standard loans. While the collateral value is an important component of the loan, the lender must also receive information on a borrower’s credit profile. A borrower’s credit score and debt to income will also be important factors considered in the loan underwriting process.
Often secured lenders are willing to lend approximately 70% to 90% of a borrower’s collateral value for secured property. This value can vary significantly by lender and for different types of collateral.
Home loans are one of the most common types of secured loan with the title to the property held by the lender until full payment has been made. Large consumer banks such as Bank of America and Citibank are common sources for secured home mortgage loans. These lenders may be willing to lend up to 90% of the appraised collateral value of a home requiring only a 10% down payment.