Financial Terms / collateral

Learn All About Collateral

Collateral is the key to unlocking a secured loan. It provides a layer of protection for the lender should the borrower fail to fulfill their loan obligations.


Collateral Value/Borrowed Amount

How do I calculate the collateral?

When considering a loan, lenders use the collateral coverage ratio to help determine the maximum loan limit for a borrower. This ratio compares the discounted value of the collateral to the amount borrowed. To calculate the collateral coverage ratio, use the formula Collateral Value/Borrowed Amount. To determine these values, you may need to use programs such as Sourcetable.

What is Collateral?

Collateral is an asset that a borrower pledges as security for a loan. It is used to reduce the risk for lenders, and if a borrower defaults on the loan, the lender can seize the collateral.

What is a Collateralized Loan?

A collateralized loan is a loan that uses an asset as security for repayment of the loan. The asset is referred to as the collateral.

What is the Purpose of Collateral?

The purpose of collateral is to reduce the risk that a lender takes on when issuing a loan. If a borrower defaults on the loan, the lender can seize the collateral to cover the cost of the loan.

Key Points

How do I calculate collateral?
Collateral Value/Borrowed Amount
Collateral Value
Collateral is an asset or group of assets that are used to secure a loan. It's value is used to determine the loan-to-value (LTV) ratio, which is the size of the loan relative to the collateral value.
Estimating Collateral Value
Estimating the collateral value is an important step in the loan process. This can be done by reviewing comparable transactions, relying on tax assessments, and/or consulting with subject-matter experts.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) is the size of a secured loan relative to the collateral value. It is calculated by dividing the loan amount by the collateral value.

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