Collateral is an asset or group of assets that a borrower or guarantor has pledged as security for a loan. The lender has the legal right to seize and sell the asset(s) if the borrower is unable to pay back the loan by the agreed date. An example of collateral is the house bought with a mortgage.

Because of the extra security provided to the lender by having collateral, the amount borrowed may be higher and/or the associated interest rate may be reduced. In many cases, it is not possible for a borrower to obtain a loan without collateral.

There is no collateral associated with credit card debt, which (in part) explains the high interest rates charged by credit card providers.

Related Courses

CFO Guidebook 
Corporate Finance 
Treasurer's Guidebook