Overcollateralization - OC

We don’t ask for much, but we sure would like to buy a vacation home in Vermont. It doesn’t have to be fancy; we’re pretty sure we can find what we want for under $300,000. Our lender doesn’t seem as enamored with the idea as we are, so to sweeten the deal, we put up our $10,000,000 spread in San Diego as loan collateral. No way we don’t get that $300,000 loan now.

This is what’s known as “overcollateralization:” we offered up as loan collateral an asset that is worth way, way more than the loan we’re trying to secure. Generally speaking, collateral is usually worth about 10-20% more than the loan amount, not 33 times more, like our house in San Diego.

But hey, the more the collateral is worth, the less risk our lender has to take on, which means we’re a lot more likely to get the loan we want, even if our credit is less than perfect. Loos like we’ll be on our way to the Green Mountain State in no time.