Collateral
Collateral is a asset or group of assets that a lender can seize in the event of a loan default. Collateral make loans more secure as the lender can recover the collateral if the debtor defaults.[1]
As an example: if a homeowner fails to make their mortgage payments on time, the bank that issued the loan can reposes the house and sell it on the market. Similarly if a firm fails to meet its payments and it posted its accounts receivable (money that is owed to the company by others)as collateral than the lender can seize these receipts and collect on them.[2]
Examples of Collateral
- Property
- Financial assets
- Life insurance policy
See Also
references
- ↑ J.Black, N. Hashimzade, and G. Myles. (2009) "Collateral." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-447?rskey=Wm46Su&result=1, 2009 [Aug 20, 2016]
- ↑ J. Berk et al. Corporate Finance. Toronto: Pearson Canada Inc., 2012, pp. 932.