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Understanding Collateral for Lenders

When underwriting any secured loan a lender needs to understand the underlying collateral, its market value and its liquidation value. The underwriting process becomes more difficult when the collateral type has less developed secondary markets and therefore more obstacles to liquidate. Typically, the more specialized the collateral the less developed the secondary market is and the greater the difference between market value and liquidation value. The more liquid the collateral is the easier a liquidation value can be determined. This section discusses collateral types, their underwriting, and liquidation potential.