What is cross collateralization?

Cross collateralization involves using an asset that’s already collateral for one loan as collateral for a second loan. The loans can be of the same type, as in a second mortgage, but cross collateralization also includes using an asset, such as a vehicle, to secure another sort of financing, such as a credit card.

What is the collateralization ratio of a loan?

The collateralization ratio is the collateral value of the loan divided by the value of the loan. Loans that are over collateralized will have a value greater than 1. Loans that are under collateralized will have a value lower than 1. What Is an Under-Collateralized Loan?

What are examples of collateralized loans?

Businesses typically use collateralized loans to fund expansion and improvement projects. A home mortgage and a car loan are two common examples of collateralization. The house or the car may be seized by the lender if the borrower defaults on the payments. Collateralization is also common for business loans.

What is an over-collateralized loan?

An over-collateralized loan is a loan that is backed by more collateral than it is worth. While in many cases, it is ideal to provide lower collateral so you do not put the collateral at risk, overcollateralizing a loan may be necessary in some cases, such as if you want to secure better terms.