Collateral
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Collateral
To help ensure the repayment of a loan or debt security, a debt issuer can provide extra assurance for investors in the form of pledged assets called collateral. Collateral is any asset that secures a loan or debt. If the issuer fails to repay the loan on time, the investor can seize or sell the collateral to recover the balance of the loan.
Things To Know
- Collateral minimizes the risk of an investment’s default.
The value to the investor
Adding collateral minimizes the risk of an investment’s default, since the issuer does not want to lose the pledged collateral due to nonpayment. This makes the investment more attractive to investors. While collateralizing a loan or debt security does not guarantee that the loan’s principal and earned interest will be repaid on time, it is a strong indication that this will occur.