collateralized

Collateralized describes a debt or security that is secured by specified assets pledged by the borrower. The lender gains a claim on the collateral if the borrower fails to meet the obligations, which reduces credit risk and can enable more favorable terms. Collateral can be tangible assets such as real estate, vehicles, inventory, equipment, or intangible or financial assets such as accounts receivable, stocks, or bonds. The arrangement is typically documented in a loan or security agreement, and steps such as perfection may be used to establish and preserve the lender’s rights against third parties.

In lending, collateralization leads to secured loans with terms influenced by the collateral value and liquidity. The loan-to-value ratio (LTV) signals the ratio of the loan amount to collateral value. Lenders may require overcollateralization or margins to provide a cushion, and valuation risk is monitored. In case of default, the lender can seize and liquidate the collateral to recover losses; the process and priority of claims are governed by contract and applicable law.

In structured finance, collateralization underpins securitized products. Pools of assets are used to back securities, with cash flows allocated to different tranches according to risk and return. Notable examples include collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs), and asset-backed securities (ABS). Collateralization provides credit enhancement but also concentrates risk in the collateral pool, and complexity can obscure true risk.