If an official talking about some policy refers to a collateral issue, he or she means something that may be affected but isn't central to the discussion. To an anthropologist, your cousin would be called a collateral relative, since he or she (unlike your grandmother, brother, or daughter) is "off to the side" of your direct line of descent. As a noun, collateral means something provided to a lender as a guarantee of repayment. So if you take out a loan or mortgage to buy a car or house, the loan agreement usually states that the car or house is collateral that goes to the lender if the sum isn't paid.

Collateral guarantees a loan, so it needs to be an item of value. For example, it can be a piece of property, such as a car or a home, or even cash that the lender can seize if the borrower does not pay."}},{"@type": "Question","name": "What Loans Do not Use an Asset as Collateral?","acceptedAnswer": {"@type": "Answer","text": "If you don't have any collateral necessary to secure a certain type of loan, you may want to consider looking into unsecured loans, such as a personal loan or credit card (both of which don't use an asset as collateral), as an alternative."}},{"@type": "Question","name": "Do I Get Back My Collateral?","acceptedAnswer": {"@type": "Answer","text": "If you have any assets being used as collateral on a loan and don't miss any payments, you won't lose your collateral. However, if you fail to make payments on time and ultimately default on your loan, the collateral can then be seized and sold, with the profits being used to pay off the remainder of the loan."}}]}]}] Investing Stocks  Bonds  ETFs  Options and Derivatives  Commodities  Trading  FinTech and Automated Investing  Brokers  Fundamental Analysis  Technical Analysis  Markets  View All  Simulator Login / Portfolio  Trade  Research  My Games  Leaderboard  Banking Savings Accounts  Certificates of Deposit (CDs)  Money Market Accounts  Checking Accounts  View All  Personal Finance Budgeting and Saving  Personal Loans  Insurance  Mortgages  Credit and Debt  Student Loans  Taxes  Credit Cards  Financial Literacy  Retirement  View All  News Markets  Companies  Earnings  CD Rates  Mortgage Rates  Economy  Government  Crypto  ETFs  Personal Finance  View All  Reviews Best Online Brokers  Best Savings Rates  Best CD Rates  Best Life Insurance  Best Personal Loans  Best Mortgage Rates  Best Money Market Accounts  Best Auto Loan Rates  Best Credit Repair Companies  Best Credit Cards  View All  Academy Investing for Beginners  Trading for Beginners  Become a Day Trader  Technical Analysis  All Investing Courses  All Trading Courses  View All TradeSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.InvestingInvesting Stocks  Bonds  ETFs  Options and Derivatives  Commodities  Trading  FinTech and Automated Investing  Brokers  Fundamental Analysis  Technical Analysis  Markets  View All SimulatorSimulator Login / Portfolio  Trade  Research  My Games  Leaderboard BankingBanking Savings Accounts  Certificates of Deposit (CDs)  Money Market Accounts  Checking Accounts  View All Personal FinancePersonal Finance Budgeting and Saving  Personal Loans  Insurance  Mortgages  Credit and Debt  Student Loans  Taxes  Credit Cards  Financial Literacy  Retirement  View All NewsNews Markets  Companies  Earnings  CD Rates  Mortgage Rates  Economy  Government  Crypto  ETFs  Personal Finance  View All ReviewsReviews Best Online Brokers  Best Savings Rates  Best CD Rates  Best Life Insurance  Best Personal Loans  Best Mortgage Rates  Best Money Market Accounts  Best Auto Loan Rates  Best Credit Repair Companies  Best Credit Cards  View All AcademyAcademy Investing for Beginners  Trading for Beginners  Become a Day Trader  Technical Analysis  All Investing Courses  All Trading Courses  View All EconomyEconomy Government and Policy  Monetary Policy  Fiscal Policy  Economics  View All  Financial Terms  Newsletter  About Us Follow Us      Table of ContentsExpandTable of ContentsWhat Is Collateral?How Collateral WorksTypes of CollateralExamples of Collateral LoansFrequently Asked Questions (FAQs)The Bottom LinePersonal FinanceLoansCollateral Definition, Types, & ExamplesBy


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If you don't have any collateral necessary to secure a certain type of loan, you may want to consider looking into unsecured loans, such as a personal loan or credit card (both of which don't use an asset as collateral), as an alternative.

If you have any assets being used as collateral on a loan and don't miss any payments, you won't lose your collateral. However, if you fail to make payments on time and ultimately default on your loan, the collateral can then be seized and sold, with the profits being used to pay off the remainder of the loan.

Put simply, collateral is an item of value that a lender can seize from a borrower if he or she fails to repay a loan according to the agreed terms. One common example is when you take out a mortgage. Normally, the bank will ask you to provide your home as collateral. This means that if you fail to meet the repayment terms of your mortgage, the bank has the right to take ownership of your home. The bank can then sell your home in order to recoup the money that it lent to you. Collateral acts as a guarantee that the lender will receive back the amount lent even if the borrower does not repay the loan as agreed.

Collateral pledged to Federal Reserve Banks (Reserve Banks) can be used to secure discount window advances andextensions of daylight credit or master account activity including charges associated therewith. For moreinformation on the use of collateral under the Payment System Risk (PSR) policy, refer to the Guide to the FederalReserve's Payment System Risk Policy on Intraday Credit found on the Payment System RiskRelated Policy Documents site.

Reserve Banks accept a wide range of securities as collateral. General acceptance criteria for securities can befound below, followed by a detailed list of eligible security types, valuation information, and pledginginstructions.

AAA-rated collateralized debt obligations (CDOs) denominated in U.S. dollars are generally eligible for pledge with the exception of interest only (IOs), principal only (POs), IO-ette, residuals, inverse floater, and Z tranches.

AAA-rated collateralized loan obligations (CLOs) denominated in U.S. dollars are generally eligible for pledge with the exception of interest only (IOs), principal only (POs), IO-ette, residuals, inverse floater, and Z tranches.

Agency backed pass-through mortgage securities, commercial mortgage- backed securities, and collateralized mortgage obligations (CMOs) denominated in U.S. dollars are generally eligible for pledge, with the exception of interest only (IOs), principal only (POs), IO-ette, residuals, inverse floater, and Z tranches.

Eligible Reserve Bank loan types and Margin Categories correspond to report codes on the FFIEC 031/041/051 CallReport, the FBO FFIEC 002 Call Report, or NCUA Call Report, as applicable (Call Report). Call Report codes aremapped to internal collateral loan types and margin categories in order to apply a margin as defined on the LoanTypes and Call Report Mapping table. For additional information on how to pledge loans, reference the Pledging Collateral page.

Foreign obligor loans (FOL) are loans to entities or individuals that are incorporated or domiciled outside of theU.S. or whose principal place of business or main office is outside of the U.S. For loans that rely on the strengthof guarantors, the domicile of the guarantor determines the classification (e.g., loans to U.S. shell companies thatare guaranteed by foreign parents are considered foreign). Loan facilities with multiple borrowers and/orguarantors, some of which are domestic and some of which are foreign, present special issues that should bediscussed with the local Reserve Bank before they are pledged. Due to the risk that a Reserve Bank may be unable toperfect or enforce its security interest in such collateral, the Federal Reserve restricts the eligibility ofpledges of FOL collateral to include only:

Any FOL collateral discovered during a routine BIC inspection that has either not been reported or has not receivedan acceptable legal opinion will be given zero value or the pledging institution will be required to remove the FOLcollateral from the BIC pledge. Violations of this policy could result in an institution being deemed ineligible forthe BIC program.

The idea of offering up something of value to convince a lender in order to borrow money is a fundamental concept in finance. The practice goes back as far as ancient civilizations like those in Greece, Rome, and India. As this concept is fundamental to asset-backed lending, a thorough understanding of how collateral works is necessary for those interested in investments that are secured by collateral.

Taking collateral as security for a loan can help reduce the risk of default for a lender who can foreclose against the collateral in the event of a borrower default. However, building collateral into a loan structure does not fully mitigate the risk of non-payment for lenders. Collateral can lose value, and secured creditors can have competing claims on the same collateral, and foreclosing against collateral can take time and money or be delayed if the borrower files for bankruptcy. 2351a5e196

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