What is the difference between a primary security and a collateral security?

Answer 1

Primary security is the security someone offered to a bank to cover any risk the bank faces by granting a credit facility to a borrower. However, sometimes a single security may not be sufficient to cover the risk.

Example: X bank grants a credit facility of $100 to a borrower called 'B,' and the borrower offers a bare land of $60 to the bank as the security. As you can see, the is bank facing a risk of $40.

To cover up the balance of the credit risk, the borrower needs to offer another security. This new security is known as a collateral security.

• In that case, any security other than the primary security is a collateral security.
• It is very common that collateral securities are used to cover more than a single credit facility risk. Collateral securities are generally used to cover the balance of the risk, which is unable to cover by primary. However, the actual value of the collateral security is much higher than that. (Example: The borrower 'B' offers a commercial property of $60 as the collateral security of above loan. Now he can apply for another loan by offering the balance of $20 of the same property.)