Legal Definitions - good-faith margin

Definition: Good-faith margin refers to the amount of margin that a creditor would typically require for a specific security position, based on good judgment. This amount is established without considering the customer's other assets or securities positions held with respect to unrelated transactions.

• When an investor buys securities on credit through a broker, they may be required to pay a good-faith margin to protect the broker against losses. For example, if an investor wants to buy $10,000 worth of stock on margin, the broker may require a good-faith margin of $2,000.
• Another example of good-faith margin is when a borrower takes out a loan and uses collateral to secure it. The lender may require a good-faith margin, which is the difference between the loan's face value and the market value of the collateral. For instance, if a borrower wants to take out a $50,000 loan and uses their car as collateral, the lender may require a good-faith margin of $10,000 if the car is worth $40,000.

These examples illustrate how good-faith margin is used to protect creditors against potential losses. By requiring a certain amount of margin, creditors can ensure that they have some protection if the value of the securities or collateral decreases. Good-faith margin is typically based on industry standards and the creditor's assessment of the risk involved in the transaction.