What is collateral in banking?

What is Collateral? Collateral is an asset pledged by a borrower, to a lender (or a creditor), as security for a loan.

What is collateral pledging a loan?

By pledging collateral as part of a financing arrangement, a borrower can obtain financing at lending terms that it otherwise would likely not have been able to receive. For a borrower’s request for a loan to be approved, a lender could demand collateral as part of the deal in an effort to protect their downside risk.

Why do lenders request collateral?

Collateral serves as evidence that a borrower intends to repay their debt obligations as outlined in the loan agreement, which minimizes the risk to the lender. Unless the provider of the debt is a distressed fund seeking majority control in anticipation of default, most lenders request collateral for the following reasons:

What is overcollateralisation & limited access?

Overcollateralisation: when you have to provide more collateral than the loan's value, which can be an issue if the collateral's value drops or if you need it for other purposes. Limited access to collateral: can be problematic since it ties up assets that you may need for other purposes.