Collateral is property or other assets that a borrower offers a lender to secure a loan. Collateral can be seized by the lender to recoup their losses if the borrower stops making the promised upon loan payments.
Examples of situations where collateral may be used are when an individual needs a loan to buy a home, a vehicle or business equipment. The risk presents itself to the lender that the borrower could default on their loan, and not be able to make their payments. This could be due to the borrower losing their job, becoming disabled or becoming bankrupt.
In the situation where the borrower defaults on their loan, the lender would be able to take the collateral to recoup their losses. The collateral in each of the presented examples would be the items purchased with the loan.
– Information compiled by Anthony Ahlegian