How do you assess collateral value and adequacy for a secured loan?

• A. Use borrower's stated value only
• B. Obtain independent appraisals, monitor asset values, calculate collateral coverage ratio and loan-to-value, and consider liquidation costs and enforceability
• C. Rely on market price at origination and ignore changes
• D. Ignore liquidation costs and enforceability

Answer: (B)

Assessing collateral value and adequacy hinges on objective, ongoing evaluation of the asset’s worth and how that value supports the loan. Obtain independent appraisals or valuations from qualified professionals rather than relying on the borrower's stated value, and regularly monitor asset values over the life of the loan. Apply quantitative measures such as the collateral coverage ratio (value of collateral relative to the loan balance) and the loan-to-value ratio to determine the cushion and risk. Also account for costs to liquidate the collateral and ensure enforceability—whether you can legally seize and sell the asset if needed. This combination provides a robust, defendable view of whether collateral remains sufficient to secure the loan, even as market conditions change. Relying on stated values, origination market price, or ignoring changes and costs leaves you with an inflated sense of protection and greater risk of loss.