Collateral Loan Market
Collateral loan market forms, by and large, the largest and the best developed section of the money market. In this market, loans are given against the security of government bonds, shares of first class companies, agriculture and manufactured commodities and bullion and jewelery.
If the borrower stop making the promised loan payment the lender of loan can seize the collateral regain its losses. Because these collateral gives some security to lender means when borrower fail to make the payment of the loan amount then the lender can get his money back through collateral deposited by the borrower.
It is generally lenders,other and banks to accept securities as collateral at 80% of its market value.
Example of collateral loan :
Suppose if you want to start a business with Rs 100000 now if you go to bank to lend some money the bank will ask for some collateral to give you loan > the collateral may consist of financial instrument ,house ,cash or even objects as arts jewelery or other item and these item need to have market value of more than 100000.
See also:Journal entry of Loan in accounting