Collateral types and Importance in Financial Transactions

Опубликовано: 07 Май 2025
на канале: Financial Masters

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Collateral in the financial world is a valuable asset that a borrower pledges as security for a loan.

For example, when a homebuyer obtains a mortgage, the home serves as the collateral for the loan. For a car loan, the vehicle is the collateral. A business that obtains financing from a bank may pledge valuable equipment or real estate owned by the business as collateral for the loan. In the event of a default, the lender can seize the collateral and sell it to recoup the loss.
Financial collateral means cash (money in bank accounts), securities (both debt and equity) and credit claims (sums owed to banks). Cash and securities are the principal forms of collateral used in the financial markets, while credit claims are an important class of collateral for certain specialized market operations.