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Old 2009-09-17, 22:49   Link #32
Join Date: Jul 2009
Originally Posted by DreXav View Post
To illustrate it with a real life example, to take, let's say, 250k credit from bank, you would have to put your house worth 700k as mortgage. Basically, the Derrink Company is loaning a huge amount of solid, cold cash to Lawerence with taking Horo as insurance that Lawrence pays them back. In case he doesn't, Horo's value is more than enough to compensate.
I can't tell if this is just unclear or wrong, but let me put it the way it should be.

First thing: the way your wrote it, one could understand that if you borrow 250k and you have 700k of home equity, defaulting on the 250k causes you to lose 700k worth of house. This is just not so. If you default on your 250k debt, the house must be sold, and the creditor gets paid off from the proceeds of the sale. If there is any money left after the sale, the owner gets to keep that money. So if you default on the 250k and the house (initially valued at 700k) sells for 650k, your creditor gets 250k, and you get the remaining 400k. The creditor isn't entitled to any more than what they are owed.

Second: you make it sound like the collateral must be worth more than the loan. In fact, the value of the collateral has a very loose relationship to the amount of the loan. Typically, in fact, the collateral is worth less than the loan. The point of the collateral is to reduce the risk to the lender, not to eliminate it. So for example, a lender who lends you 800k without any collateral can lose up to 800k; if they lend you that against a 700k house in collateral, then they can only lose 800k minus the value of the house (which may go up or down).

I have to rewatch the episode to work out the details, but if I recall correctly, Lawrence gets a 2000 silver loan with Horo as collateral. This by itself doesn't say much about Horo's value as a slave, but assuming that Lawrence tries to borrow as much as Derrink is willing to lend on that collateral, they value Horo at less than 2000 silver.
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