Additional collateral is any assets put up as collateral for a loan along with anything that was already offered as collateral.
Additional Collateral Details
Banks or other lenders sometimes require collateral on loans for a couple of different reasons. One reason is to protect the bank from losing all the money that it lent if the borrower defaults on the loan. Another reason is to help keep the loan at a low and steady interest rate. A third reason is simply to appease investors or creditors.
If a borrower defaults or cannot pay back the loan for any reason, the bank or lender can repossess the borrower's assets they put up as collateral. If the assets are items such as a car or a house, the bank or lender has the right to sell them to make up for the money they lost when the borrower defaulted on the loan.
A bank or lender can require additional collateral if they give additional funds on top of what they already lent. Collateral needs to meet or exceed the amount of the loan.
Example of Additional Collateral
Jane wants to open a bakery and approaches an investor about lending her the money to get started. The investor agrees to lend the money on the condition that Jane puts up collateral. Jane agrees and offers her house as collateral. Jane has five years to pay back the money.
After several months, Jane needs additional funds to buy some equipment she had not thought she would need. The lender gives the money but asks for additional collateral because she hasn't paid off the first loan yet. Jane agrees and offers all the equipment in her bakery as collateral.
Types of Collateral
There are many types of collateral. The collateral a lender or bank accepts all depends on how much the loan is for. Collateral must meet or exceed the amount of the loan. Below is a shortlist of items that a borrower can offer as collateral.
- Certificates of deposit
- Letters of credit
Now, remember these are just a few examples. There are many other things that a borrower can offer as collateral. If you need to provide a bank or lender with collateral, you will need to negotiate with them as to what is acceptable.
Significance of Additional Collateral
Sometimes the borrower does not have the collateral on hand right at the time of the loan. When this happens, banks or lenders agree to give the loan on a certain condition. The condition is that when the collateral becomes available, the borrower immediately pledges it as collateral for the loan.
In all of this, the borrower needs to make sure that they can pay back the loan. Defaulting on a loan is not a good thing and can do major damage to a borrower's credit. Any person who borrows money should plan to pay it back in full, but this is especially true if the lender requires collateral.