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Impact on Borrowing Costs
A borrower's creditworthiness is central to credit approval. Collateral is thus not the single determining factor, as the bank must also be able to calculate the risk involved. This is because it has an obligation to its other clients to invest their money as securely as possible. In order to reduce transaction risk, therefore, the bank sometimes demands collateral, to which it would have recourse in the event of the borrower's inability to repay the loan. The collateral provided by the borrower can thus have a positive impact on credit approval and the costs of borrowing. For example, if a high-risk borrower can provide good security, they might be assigned to a lower risk class and thus pay less for credit.
Valuation of collateral
Collateral is never regarded as providing 100% credit cover, as it must also secure current interest. Furthermore, the value of tangible collateral is often subject to fluctuation. This is why, while 95% of the current value of a cash or savings account may be used as security, the corresponding figure for building land is only 50%.
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