What is collateral?

Collateral Definition: Collateral is an asset that becomes security for a loan if it is not paid in full. Collateral is usually a significant asset, such as property, a home, or a car. It’s a form of protection that assures the lender that they will have an asset to acquire if payments cease or the borrower defaults on loan.

When a loan application indicates that a borrower has a low credit score or rating, collateral may be required to secure a loan, giving the lender more confidence to recoup the amount owing. Other forms of collateral include an investment account, savings, or a collateralized loan.

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