Overcollateralization

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Overcollateralization

The practice or process of placing an asset as collateral on a loan where the value of the asset exceeds the value of the loan. For example, a person could pledge a farm (worth $10 million) on a loan for $5 million. Usually, however, the value of the asset only exceeds the value of the loan by 10-20%. Overcollateralization reduces the risk for the lender and improves the borrower's creditworthiness. It is used most commonly when a bond issuer wishes to improve its credit rating.
References in periodicals archive ?
Banks that are inexperienced in a specific industry often over-collateralize loans.
The percentage of longevity assets would over-collateralize the entire structure and would ensure repayment of the principal and profit of the certificates without relying on the performance of the underlying assets, thus effectively protecting the investor's principal.