Collateral

Collateral is an asset pledged by a borrower to secure a loan. It acts as a safeguard for lenders—if the borrower fails to repay, the lender can claim the collateral to recover the loss. This arrangement reduces the risk for lenders and often enables borrowers to access better loan terms.

Common examples include using a car for an auto loan or a house for a mortgage; if payments stop, the lender can take back the vehicle or property. Collateral isn’t limited to physical assets—bank accounts or investments can also serve this purpose. In home equity loans, your home itself becomes collateral again for borrowing against its value. Ultimately, collateral builds trust in lending by providing a backup for repayment if something goes wrong.