Debitoor's accounting dictionary

Collateral - What is collateral?

Collateral is an asset, such as equipment or property, that is offered to a lender as security in order to be issued a secured loan

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Collateral is provided in cases where a borrower needs to provide an added amount of security to the lender in the situation where they are unable to make the loan payments.

By putting up an asset as collateral, the borrower gives the lender the ability to seize the asset, should they be unable to meet the requirements agreed upon when negotiating the loan.

What can be used as collateral?

Collateral generally involves an asset such as gear or equipment, a vehicle, land, property, or funds in an account. These assets have a clear cash value that offsets the principal loan amount and interest in the event that the payments cannot be made.

Collateral can take many forms, such as a car, to grant a secured loan

Typically, the type of collateral is related to the type of loan - for example, a house for a mortgage, a car for an automobile loan, etc.

Cash collateral account

A cash collateral account is used only for depositing checks and cash. Because it is not used for withdrawals, it can be leveraged as collateral for secured loan purposes or to provide security on a particular project or endeavour.

Marketable collateral

Another type of collateral is known as marketable collateral, which is when assets that can quickly be converted to cash, such as stocks or bonds, are used to provide security for a loan. This type of collateral has straightforward value and can easily be exchanged for cash amounts.

Why is collateral used?

By using a form of collateral, the interest rates for a loan are significantly less than money that is borrowed on credit, or an unsecured loan. It also means that the loan is lower-risk for the lender due to the fact that there is backup in the event that payment cannot be collected.

Collateral and Debitoor

With one of the larger Debitoor plans, you can record the value of your assets and track depreciation. It’s important to stay on top of your finances and have an idea of whether you can manage payments on a secured or unsecured loan.

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