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What is a Collateral?
Collateral is described as assets you pledge to lending institution to get a loan. Collateral assets can be anything from home, car, shares, cash and business. If you have collateral, you can get a "secured" loan at better rates than if you had no collateral. One of the reasons it is more difficult to receive a loan for a startup is that there are not yet any business assets which can be used as collateral.
If the collateral given decreases in value and the borrower defaults, he or she will still be responsible to repay the amount at which the collateral was previously assessed. For example, a person borrows $100,000 on a home of the same value. If the home decreases in value, say to $75,000, the borrower must still pay back the full amount, as dictated by the terms of the collateral loan. If a borrower has defaulted on the collateral loan, his or her home will be sold. However, the borrower will still owe the lender $25,000. This may require the borrower to sell more possessions or enter bankruptcy.
What is Credit?
What is a Credit Line?
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