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TeachMeFinance.com - explain Collateral loan historic definition...
Collateral loan -- Such a loan is a loan on a promissory note
secured by collateral.
The collateral in the case of a Wall Street loan consists of
securities (stocks and bonds ). It is the custom of banks and
other lenders to accept securities as collateral at 80 per cent
of their market value. If the market value of the securities
declines subsequent to the making of a loan the lender may
call for (demand) additional securities. The replenishment
of the collateral with additional securities is called remargining.
If additional securities are not provided on demand the
lender has the right to demand payment of the loan, no matter
if it is a time loan and has not matured. If the loan is not
paid the lender may without further notice sell the securities
by public offering (on the stock exchange or by auction).
If the sale of the securities does not realize the amount of the
loan the lender may take judgment for the balance and collect
it by process of law.
It is the same with a call loan as with a time loan the additional
securities must be provided or the loan repaid or the
securities may be sold and judgment taken for any deficiency.
Except when there is an agreement permitting it a lender
has no right to retain collateral to secure any loan but the one
for which it was to serve as security. It may be recovered by
suit and the borrower may also recover any loss which he may
have suffered from the unjustifiable detention of his securities.
In New York securities pledged as collateral are said to
have been hypothecated.
In London securities pledged as collateral are said to have
been pawned.
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