Additional Collateral: What It Is, How It Works, Types

What Is Additional Collateral?

Additional collateral refers to additional assets put up as collateral by a borrower against a debt obligation. If a loan cannot be secured solely by the property being purchased, then additional collateral will be required.

Understanding Additional Collateral

Additional collateral is used to lessen the risk that the lender takes on when issuing a loan. There are several reasons creditors might require further collateral. A lender may ask for additional collateral in order to appease investors or a credit committee.

Collateral is property or another asset that a borrower offers as a way for a lender to secure the loan. If the borrower defaults on a loan, the lender would have the right to seize the collateral in an attempt to pay off the remaining debt.

Since collateral offers some security to the lender should the borrower fail to repay the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. For a loan to be considered secure, the value of the collateral must meet or exceed the amount remaining on the loan. Offering additional collateral can help a borrower qualify for more favorable interest rates.

Sometimes creditors require additional collateral to keep a given loan at a constant interest level. If the lender provides additional funds on top of an already existing loan, then more collateral might also be required. Additional collateral can include cash, certificates of deposit (CDs), equipment, stock, or letters of credit.

Common Types of Collateral

One of the most well-known forms of collateral is mortgage collateral. For a mortgage, the collateral is the house purchased with the funds from the mortgage. If payments on the debt cease, the lender can take possession of the house through a process called foreclosure.

Once the property is in the lender’s possession, the lender can sell the property to get back the remaining principal on the prior loan. The lender’s claim to the borrower's collateral (in this case, the house) is called a lien.

Additional Collateral and After-Acquired Collateral

Sometimes a lending institution requires more collateral than the borrower can put up to have more security for the loan. In this case, the borrower agrees to pledge all future property up to a certain amount as additional collateral for the loan. A lender may take additional collateral for a loan after the borrower and lender have already entered into a loan agreement, which is sometimes referred to as after-acquired property. When a borrower has insufficient collateral for a loan but will be acquiring additional assets in the near term, a lender may choose to issue the loan anyway. Then when the borrower receives those assets, they would be automatically collateralized.

The Bottom Line

All secured loans require collateral, but some require more than others. Additional collateral may help you secure a lower interest rate or a loan that you might not have qualified for otherwise.