Collateral

The term collateral refers to an asset that a lender accepts as security for a loan. Collateral may take the form of real estate or other kinds of assets, depending on the purpose of the loan. The collateral acts as a form of protection for the lender. That is, if the borrower defaults on their loan payments, the lender can seize the collateral and sell it to recoup some or all of its losses.

Simply put, the word collateral is something of value given as a guarantee to obtain something else. For instance, a borrower may offer their car as a collateral to a lender when taking out a loan. The vehicle acts as a safeguard or warranty in case the borrower fails to pay their debts. Usually, collateralized loans present much lower interest rates when compared to non-collateralized ones. Collateral can come in different forms. Some of the most common types include mortgage collaterals, invoice financing, and margin trading collaterals.