Cash Collateral
When you have a mortgage, the collateral is your house. With a car loan, the car represents your collateral. Cash collateral is cash or cash equivalents that a company puts aside for their creditors to collect on, in the event they go belly up and have to file Chapter 11 bankruptcy. It's collateral that's cash.
Creditors have the ability to collect from the sale of securities, assets, furniture, light fixtures, toilet seats...whatever they can get their hands on and is covered in the bankruptcy filings. It's kinda like the rundown, roach infested apartment you rented in college from the local slumlord. He kept your parent's fat security deposit as collateral for any damages that might have come about during the nightly keggers you hosted. (You had planned to diligently study each night but your foreign exchange student roommate had other plans).
And when you moved out, your landlord kept every single penny of that cash collateral even though you tried to clean the vomit stains out of the carpet and fill the holes with toothpaste.
Related or Semi-related Video
Finance: What are Payday Loans?25 Views
finance a la shmoop what are payday loans well this you want to stay away
from payday loans if you are so strapped for cash [girl gives out payday candy bar]
that you need to borrow money to pay the rent and you only have the promise of [hand takes money and leave I.O.U. sticky note]
your future paycheck to borrow against well something has clearly gone wrong [girl looking through papers]
along the way and you shouldn't trust the snazzy-looking television [TV add for loans]
commercials you're seeing out there a payday loan is a loan using the promise
of delivery of cash on your payday cheque as collateral and for most
companies loaning money on payday this is an extremely profitable business
because they quote only charge you 2% unquote for the loan but let's do the
math you're getting the cash two weeks early and last time we looked at a
calendar there were 52 weeks in a year or 26 bimonthly pay periods so if
they're charging you 2% to lend you money for one of those bimonthly pay
periods well their annualized rate that they're charging you for lending you
that money well that's 52 percent a year right 26 times 2% it's 52 percent a year
even the worst credit cards charge dramatically less than this rate of
interest so how do payday loan places get away with such high rent on your
hard-earned money well if you have to borrow money in this form with such
urgency well you're likely a very bad credit [woman sends man out to pay grandma]
risk and the perceived odds of you simply vanishing are well they're high [man gets into car with suitcase]
and the odds you are financially unsophisticated are almost by definition
certain because if you did do the math you get even an expensive credit card to
float you the thousand bucks or whatever your paycheck was or five hundred
dollars for that half month period to just get by until the next month right
so if you ever find yourself needing a payday loan let's hope you can work a
few long weekends saving enough money so that you don't need these things anymore [man working on computer]
and next time well you know what they say stay in school [school kids collaborating on project]
Up Next
What is collateral? Any type of asset or property that a borrower pledges as security for a loan is classified as collateral. As the lender has a c...
What is the loan-to-value ratio? Loan us some of your time and watch this handy video.
What is the process of a loan? Collateral. Do you have it? The bank lending you money wants to be sure that A) they get paid back, and B) they char...
What is a savings & loan versus a bank? Hit play to find out.