What is Collateral?

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. In many cases, it is not possible for a borrower to obtain a loan without collateral.

Examples of Collateral

An example of collateral is the house bought with a mortgage. Another example is the vehicle associated with a car lease.

Advantages of Collateral

There are several advantages to the use of collateral. 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. From the perspective of the lender, collateral reduces the risk of loss on funds loaned to other parties.

Is There Collateral on Credit Card Debt?

There is no collateral associated with credit card debt. This (in part) explains the high interest rates charged by credit card providers, since they must recoup their losses on unpaid credit card debts from the high profits on this type of financing.