Advance Rate

Say you are going to get a loan. Unless you own the bank or are willing to pay loan-shark level interest, you are going to have to provide some collateral to back up that loan.

The advance rate relates the value of the collateral to the amount of the loan. It is given as a percentage, as in "Mr. Stantz, I understand you are putting up your parents' house to fund your ghost-hunting business. Your advance rate is 60%."

Think about a pawn shop: you take in your mom's wedding ring, hoping to get some cash. The wedding ring is going to be the collateral. The pawnbroker is going to bite the ring, make sure it's real gold and assess what it might be worth. It's valued at $500 and the advance rate is 80%. You are going to get $400 on that loan.

There are a number of factors that go into figuring out the advance rate. The biggest is the borrower's credit rating. There are also considerations related to the value of the collateral and the overall amount of the loan in question.