What Is Over-Collateralization (OC)?
Over-collateralization (OC) is a financial term used to describe the practice of providing more collateral than what is required for a loan. This means that if the borrower defaults on their loan, the lender will have access to additional assets beyond just those pledged as security for the loan. OC can be used in many different types of loans and investments, including mortgages, business loans, bonds, and other securities. It provides an extra layer of protection for lenders by ensuring they are able to recoup some or all of their losses should a borrower default on their debt obligations.
The amount of over-collateralization needed depends on several factors such as creditworthiness and risk tolerance levels. Generally speaking, higher amounts are typically associated with higher risks since there is less assurance that borrowers will repay their debts in full. Over-collateralization also helps reduce interest rates because it reduces the perceived riskiness of lending money out; this makes it attractive to both lenders and borrowers alike who want lower borrowing costs without sacrificing safety or liquidity options.