Asset-Backed Loans: The Basics
What counts as collateral, how LTV works, and how to avoid surprises in asset‑backed lending.
Table of Contents
What counts as collateral?
Collateral is an asset a lender can claim if the borrower defaults. The best collateral is liquid, easy to value, and has clear title — think marketable securities, vehicles with clean title, or vaulted bullion.
Lenders discount collateral using haircuts to account for price risk, liquidity, and legal frictions. The more volatile or harder to liquidate an asset is, the larger the haircut.
How LTV really works
Loan‑to‑Value (LTV) sets the maximum borrowing against the collateral’s appraised value: Max loan = Appraised value × (1 − haircut).
A conservative LTV reduces margin call risk and makes refinancing easier if rates move or collateral prices dip.
Costs you should expect
Beyond interest (APR), expect origination, storage/custody, insurance where applicable, and legal/filing fees. Always compare **APR + fees** on a like‑for‑like term basis.
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FAQ
What is a typical haircut?
It varies by asset. Highly liquid assets may see 5–20%; volatile or illiquid assets 30–60% or more.
How do I reduce borrowing costs?
Use better collateral, accept a lower LTV, and compare all‑in APR including fees.