In relation to a loan, it represents the difference between the current market value of collateral posted for a loan and the par value of the loan. It reflects the value of collateral that is often less than the stated value of the collateral or loan. In this sense, it is also known as a haircut and is usually expressed as a reduction in the value of collateral.

A haircut or margin (also, initial margin) is meant to account for the potential loss of value (of collateral) due to market value volatility and the probable cost of liquidating collateral in the event of default (the lower market price that may be attained on liquidation), and the possibility of default by the issuer of the collateral (debt securities posted as collateral).

An example of margin or margining is the situation where a bank reduces the collateral value by 5% or 10% in order to account for the multiple factors that may negatively impact the market value of the collateral over the term of a loan.