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Loan and Mortgage Terms Glossary

Haircut:

(1) that portion of an asset's value that cannot be used as collateral. For example, if 90 percent of an asset's value can be used as collateral for a loan, the haircut is 10 percent. Therefore, to provide full backing, the lender will require collateral that is valued in excess of the amount of the loan. The haircut is meant to protect the lender against a possible decrease in the value of the collateral -- to below the amount of outstanding principal -- during the life of the loan. (2) the spread in a repurchase agreement.


 
     
 
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