COLLATERAL, a term used in law in several senses. Col lateral relationship means the relationship between persons who are descended from the same stock or ancestor, but in a different line ; as opposed to lineal, which is the relationship between as cendants and descendants in a direct line, as between father and son, grandfather and grandson. A collateral agreement is an agree ment made contemporaneously with a written contract as part of the transaction, but without being incorporated with it. Collateral facts, in evidence, are those facts which do not bear directly on the matters in dispute. Collateral security is an additional secu rity for the better safety of the mortgagee, e.g., a deed of guar anty, or property deposited, to secure the fulfilment of an obli gation.
Collateral, in banking is the security which a borrower gives over to a lender as a pledge to guarantee the payment of the debt. If the debt is paid when and as agreed upon, the collateral is re turned to the borrower but if default in payment is made the lender has the right to sell the collateral and from the proceeds retain the amount due for principal and interest, returning the re mainder, if any, to the borrower. Almost any kind of property which is saleable may be used as collateral but as a matter of practice only certain types are generally acceptable to the lending banks.
The "financial type" of collateral is one of the greatest in im portance. Certificates of stock in business corporations are ac cepted as collateral if they are marketable and give evidence that they will remain so till the expiration of the time of the loan. Corporate, municipal or government bonds are acceptable if they are sound and marketable. Securities which are listed on the Stock Exchange are much preferred as collateral over unlisted and outside market securities because of their exceptional marketa bility. The borrower usually has the privilege of substituting other collateral for that already pledged provided the new collat eral is satisfactory to the lender. This privilege of exchanging collateral is especially important and necessary in the case of the investment banker who is constantly buying and selling and thus changing his securities, and in the case of the stock-broker who is continuously dealing for his clients. The "merchandise type" of collateral consists of negotiable warehouse receipts, negotiable bills of lading and trust receipts. Other collateral may be classed as "personal type," under which are included deeds, deeds of trust, mortgages, leases and similar rights in good real estate; deeds, deeds of trust, bills of sale and similar rights in movable goods capable of transfer, such as portable machinery, furniture, livestock, crops and many similar things. Savings bank pass-books, which serve as vouchers or receipts for deposits made, and with out the presentation of which withdrawals cannot be made, are often assigned to a bank as collateral for loans. Banks will de mand that the market value of the collateral exceed the amount of the loan so as to safeguard the bank in case of possible shrink age of the value of the collateral. The excess margin usually re quired is about 20%, and when, through decrease in value of col lateral, it falls below this percentage the bank can, under its cus tomary agreement, require the borrower to deposit additional collateral equal in value to the decline, or to pay off a part of the loan so that the present collateral will again supply the required margin. On a large loan bankers demand "mixed collateral," con sisting probably of railroad, industrial and other securities, rather than "straight collateral," consisting of securities of only one class. Likewise they do not grant too many small loans, each se cured by the same type. of collateral. Extremely high-priced stocks with wide market fluctuations are not considered desirable. Odd lots, i.e., batches of less than zoo shares of any stock, are unpopular because they are harder to keep track of and rather troublesome to market if a sale becomes necessary. Where cor porate securities are used as collateral they should be conservative, rather than speculative issues; active on the market rather than inactive ; and should have good delivery, that is, be negotiable in form and indorsed in blank by the borrower. Property other than securities is not acceptable unless it has a determinable value and a potential market.