Finance Understanding Collateral Finance Series I Education Hub Collateral in the financial world is an asset that a borrower pledges as security for a loan. For example, when a homebuyer obtains a mortgage, the home serves as the collateral for the loan. For a car loan, the vehicle is the collateral. A business that obtains financing from a bank may pledge valuable equipment or real estate owned by the business as collateral for the loan.  Learning Tip Collateral is an item of value pledged to secure a loan. Collateral reduces the risk for lenders If a borrower defaults on the loan, the lender can seize the collateral and sell it to recoup its losses. Understanding How Collateral is Used? Before a lender issues you a loan, it wants to know that you have the ability to repay it. That’s why many of them require some form of security. This security is called collateral, which minimizes the risk for lenders by ensuring that the borrower keeps up with their financial obligation. The borrower has a compelling reason to repay the loan on time because if they default, they stand to lose their home or other assets pledged as collateral. Loans secured by collateral are typically available at substantially lower interest rates than unsecured loans. A lender’s claim to a borrower’s collateral is called a lien, a legal right or claim against an asset to satisfy a debt. In the event that the borrower does default, the lender can seize the collateral and sell it, applying the money it gets to the unpaid portion of the loan. The lender can choose to pursue legal action against the borrower to recoup any remaining balance. Let’s see the various types of collateral loans. Loan Types Types of Collateral and Loans The nature of the collateral is often predetermined by the loan type. When you take out a mortgage, your home becomes the collateral. If you take out a car loan, then the car is the collateral for the loan. Mortgage: A mortgage is a loan in which the house is the collateral. If the homeowner stops paying the mortgage for at least 120 days, the loan servicer can begin legal proceedings, which can lead to the lender eventually taking possession of the house through foreclosure. Once the property is transferred to the lender, it can be sold to repay the remaining principal on the loan. Home Equity Loans: A home may also function as collateral on a second mortgage or home equity line of credit. In this case, the amount of the loan will not exceed the available equity. For example, if a home is valued at Rs 20,00,000, and Rs 12,50,000 remains on the primary mortgage, a second mortgage or HELOC will be available only for as much as Rs 7,50,000. Trading Margin: Collateralized loans are also a factor in margin trading. An investor borrows money from a broker to buy shares, using the balance in the investor’s brokerage account as collateral. The loan increases the number of shares the investor can buy, thus multiplying the potential gains if the shares increase in value.  Get PRO Get access to exclusive premium features and benefits. Subscribe a PRO plan. See More Related Topics Major Economic Indicators Understanding Economy Load More

Finance Major Economic Indicators Finance Series I Education Hub Economics is the study of the economy, and that picture is incomplete without a set of economic indicators. Learning Tip Economic indicators give us method to study economies via numerical and statistical analysis. These indicators are quite crucial for the study of economy. Macro-economic Major Economic Indicators These are some of the most closely watched macroeconomic indicators. Gross domestic product (GDP) nominal is the total value of all of the completed goods and services produced by an economy during a period of one year. The gross domestic product of the United States reached $26.5 trillion in 2023. The Unemployment Report estimates the number of people who are working for pay during a given period. More importantly, the number is tracked over time in order to determine whether unemployment is worsening. Inflation in consumer prices is measured and tracked so that problems in the economy can be pinpointed. If the rate of inflation is outpacing the rate of income growth, the economy is in trouble. Inflation can be negative, too; this is called deflation, but it is relatively rare. Trade Balance: An economy’s balance of trade is a comparison of the amount of money that is spent on imports of goods and services and the amount of money it earns on goods and services it exports. It is measured primarily by recording all of the products that pass through the customs office of a country. Get PRO Get access to exclusive premium features and benefits. Subscribe a PRO plan. See More Related Topics Understanding Collateral Understanding Economy Load More

Finance Understanding Economy Finance Series I Education Hub An economy is a system of inter-related production and consumption activities that ultimately determine the allocation of resources within a group. An economy may represent a nation, a region, a single industry, or even a family. Learning Tip The production, consumption, and distribution of goods and services combine to fulfill the needs of those living and operating within the economy. Understanding Types of Economy An economy encompasses all of the activities related to the production, consumption, and trade of goods and services in an entity, whether the entity is a nation or a small town. In the modern world, few nations are purely market-based or purely command-based. But most lean toward one or the other of these models. Market-based or “free market” economies allow people and businesses to freely exchange goods and services according to supply and demand. The United States is mostly a market economy. Producers determine what’s sold and produced, and what prices to charge. If they expect to succeed, they will produce what consumers want and charge what consumers are willing to pay.   Command-based economies depend on a central government that controls the production levels, pricing, and distribution of goods. In such a system, the government owns industries deemed essential on behalf of the consumers who use them. Competition among companies is discouraged or banned. Prices are controlled. Communism requires a command-based economy. Contemporary examples include Cuba and North Korea. Mixed Economies are quite common. Pure market economies rarely exist in the modern world since there’s usually some degree of government intervention or central planning. Even the United States could be considered a mixed economy. It may not mandate production but it has ways to influence it.  Let’s see how to study these economies and their classification. Classification Classification and Study of Economies The study of economies and the factors affecting economies is called economics. The discipline of economics can be broken into two major areas of focus: microeconomics and macroeconomics. Microeconomics studies the behavior of individual people and businesses in order to understand why they make the economic decisions they do and how these decisions affect the larger economic system. Microeconomics studies how a particular value is attached to a product or service. It examines how individuals coordinate and cooperate with each other in business. As the name implies, macroeconomics studies the big picture. Macroeconomics includes the study of economy-wide factors such as the effect of rising prices or inflation on the economy. It seeks to track and understand the financial indicators that clarify an economy’s success or failure over time, such as gross domestic product (GDP), changes in unemployment, and consumer spending. In short, macroeconomics studies how the economy as a whole behaves. In the next article we will see major economic indicators to further understand the study of economy. Get PRO Get access to exclusive premium features and benefits. Subscribe a PRO plan. See More Related Topics Understanding Collateral Major Economic Indicators Load More