
Collateral
In finance, 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 and sell the collateral to recover the outstanding debt. Common examples of collateral include real estate, vehicles, and financial assets like stocks and bonds.
The use of collateral reduces the risk for lenders, often allowing borrowers to access loans with more favorable terms, such as lower interest rates. However, if the borrower fails to meet the repayment obligations, they risk losing the asset pledged as collateral.
Borrowers should carefully consider the implications of using personal or business assets as collateral, ensuring they can meet the loan terms and avoid potential loss of valuable property.