Premium Essay

Economy : Collateral

In: Business and Management

Submitted By Hayee
Words 633
Pages 3
What is collateral?
Collateral is an asset promised by a borrower to a lender, commonly in return for a loan. The lender has the right to snatch the collateral if the borrower defaults on the commitment.
HOW IT WORKS?
Let's suppose you would like to borrow 200,000 TL to start a business. Even if you have an outstanding credit rating, a bank can be unwilling to lend you the money because it can be left with nothing if you default on the loan. So, the bank may require 200,000 TL of collateral in order to lend you the money. This collateral should consist of financial instruments, houses, or even objects such as jewelry, art, or other things. You might also promise your business receivables as well.
Why is that collateral important for financial markets and institutions?
Collateral is an essential building block of financial markets and affects economic growth and financial stability. It decreases risks for lenders and borrowers alike, by providing safety to lenders and permitting borrowers to obtain more credit at good rates, and plays a main part in different market functions. However, policymakers regularly overlook the important role collateral plays in financial fixtures, the financial infrastructure and the different institutions that support trading, payments, clearing, and settlement and for the economy as a whole.
Decrease of collateral value is the vital risk when securing loans with marketable collateral. Financial institutions carefully monitor the market value of any financial asset held as collateral and take suitable action if the value consequently declines below the predetermined maximum loan to value ratio.
HOW IT WORKS?
Let's suppose you would like to borrow 200,000 TL to start a business. Even if you have an outstanding credit rating, a bank can be unwilling to lend you the money because it can be left with nothing if you default on the...

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