What is collateral? Kiritsis Law Group 212 922 0005

May 13, 2021

By: John Kiritsis, Esq., CPA, MBA, MS, JD, LL.M

Generally, it refers to the pledged property that secures a loan. A collateral is often a lender’s main protection, in the event of a borrower default. In real estate transactions, a collateral usually refers to secured lending. This type of collateral usually represents a unilateral obligation, which is often secured by one or more of the following: real property, guarantee, and/or surety. Due to the protections afforded to the lender by the collateral, it allows the lender to lower the interest rate on the loan, in comparison to loans with no collateral. Without the ability of lenders to make lending decisions by relying on collateral, lending will become more expensive for everyone and/or prohibitivly more expensive for many more than our current system. Also, the use and availability of collateral may often serve as a stabilizing mechanism in a market downturn, it can serve a bottom (floor) upon which financial institutions cannot lose more money. Others make the argument that overutilization of collateral for financing leads to more. Transactions and thus higher fees for the financial industry. Others argue that using collateral to make lending decisions benefits the already wealthy individuals, at the expense of households with little or no household wealth.

 

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