An asset pledged as security for a loan; forfeited if the borrower defaults.
Collateral is an asset that you pledge to a lender as security for a loan. If you fail to repay the loan (default), the lender has the right to seize and sell the collateral to recover the loan amount. Common examples include your home (collateral for a mortgage), car (collateral for an auto loan), and equipment (collateral for business loans). Secured loans (backed by collateral) typically offer lower interest rates than unsecured loans because the lender has a tangible asset to recover if you default. The lender usually requires that the collateral's value equals or exceeds the loan amount, and may place a lien on the asset. Understanding what you're putting at risk as collateral is crucial before taking on secured debt.