Definition
Collateral is an asset or property that a borrower pledges to a lender to secure a loan. If the borrower fails to repay the loan (defaults), the lender has the right to seize the collateral to recover their losses. Collateral reduces the lender\'s risk, often resulting in lower interest rates and higher borrowing limits. Common types of collateral include real estate for mortgages, vehicles for auto loans, and cash or investments for secured loans.
Example
Mortgage Collateral Example
When you take out a $300,000 mortgage to buy a home, the home itself serves as collateral. If you fail to make mortgage payments, the lender can foreclose on the property and sell it to recover the loan balance. This security allows lenders to offer mortgage rates significantly lower than unsecured personal loans or credit cards.