Collateral

Collateral refers to an asset that a borrower pledges to a lender as security for a loan. If the borrower defaults on the loan, the lender has the right to seize the collateral and sell it to recover the outstanding debt. Common types of collateral include real estate, vehicles, stocks, and cash. Collateral reduces the lender’s risk by providing an additional layer of protection against borrower default. Secured loans, such as mortgages and auto loans, typically require collateral.

Example

A homeowner pledges their house as collateral for a mortgage. If the borrower fails to make mortgage payments, the lender can foreclose on the property to recoup the loan.