Additional collateral is a collection of additional assets by a borrower against the debt obligation to make sure that the borrower has an ability to repay the acquired debt. The major objective of the additional collateral is to minimize the risk of nonpayment of the debt to the lender and trying to increase the credibility of the borrower. The requirement of the extra collateral against the debt obligations by the creditors has a number of different reasons. The major reason of having extra collateral is to remain at a constant interest level. Another reason may be is to appease the credit committees, investors and the third parties. The examples of additional collateral include cash, certificate of deposited, equipments, letter of credits and the stocks of the business company.
As we all know that collateral is a kind of security against the loans that is used in order to increase the likelihood of the repayment of the loan. If in any case and due to any situation the borrower defaults on the loan the lender has a right to acquire the collateral so that it can be used for the repayment of the remaining loan. If the borrower wants to buy some additional funds from the lender then additional collateral may be required by the lender to make sure of the repayment of the debt.
For example a borrower has borrowed an amount of $10,000 and an amount of $2,000 asset is used by the borrower as collateral for this loan. If at any point of the duration of the loan the borrower requires additional funds or the lender thinks that the borrower is becoming too risky to afford the borrower has to add some additional collateral for security purposes.
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