What is Collateralization

Collateralization is the process of putting down a valuable asset in exchange for receiving a loan. If the borrower fails to repay the loan, the asset will be liquidated by the lender to recover the borrower's debt. Collatorized loans are typically characterized by lower interest rates compared to loans that are not backed up by collateral. The value of the collateral should be at least around 11% higher than the value of the desired loan, but a lender could ask for even more collateral depending on the type of the collateral and the level of risk the lender is willing to accept. In general, lenders usually agree to give out a loan that represents 70% to 90% of the collateral's value.