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Collateral is an asset that a borrower uses to secure a loan or other form of credit from a lender. Lenders can seize the collateral offered if the borrower fails to make the payments due under the loan agreement. A common and simple example would be someone securing a large bank loan using their house as collateral, which the bank will seize control of if the borrower does not keep up with the loan repayments.
Collateral definition
Collateral is an asset that a borrower uses to secure a loan or other form of credit from a lender. Lenders can seize the collateral offered if the borrower fails to make the payments due under the loan agreement. A common and simple example would be someone securing a large bank loan using their house as collateral, which the bank will seize control of if the borrower does not keep up with the loan repayments.
A lender feels more confident about lending money if there is collateral offered, as the lender knows they have the right over the asset and the value of that asset should it be unable to recoup the loan it has made. When collateral is involved, the borrower will be taking out a secured loan. Secured loans, because of the collateral offered, tend to carry lower interest rates than unsecured loans, which involve a borrower securing a loan with no collateral involved. This is because lending money out through an unsecured loan is higher risk than lending money out under a secured loan.
When collateral is involved, it often carries a value that is either equal to or in excess of the value of the loan or credit being borrowed.
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