Collateralization definition
/What is Collateralization?
Collateralization occurs when a borrower pledges an asset in order to obtain a loan. A lender requires collateral when the borrower does not have a sufficient lending history or cash flows to give assurance that it can repay a loan. A lender may also be able to impose a collateralization requirement on borrowers in a tight credit market, where there are few parties offering funding.
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Advantages of Collateralization
Collateralization may reduce the default risk of the lender so much that it can offer a loan at a reduced interest rate.
Example of Collateralization
For example, a public company pledges its assets as collateral on a bond offering, so that it can obtain a lower effective interest rate on the bonds from investors.