undercollateralized
Undercollateralized describes a loan or credit arrangement in which the value of the collateral backing the obligation is not sufficient to cover the outstanding exposure. In such a case a portion of the loan remains unsecured by collateral, and the lender bears a higher risk of loss if the borrower defaults. The term is often used in contrast to over-collateralized loans, where collateral exceeds the loan amount, and to unsecured loans, which carry no collateral at all.
A common way to measure collateral adequacy is the collateral ratio or loan-to-value (LTV) ratio. The collateral
Risks associated with undercollateralized loans are higher for lenders, including greater potential loss in a default,
In traditional finance, undercollateralization is managed through pricing, credit enhancements, additional collateral requirements, or by shifting