Collateral
What Is Collateral
Collateral is an asset or property that a borrower gives to a lender as security for a loan. If the borrower doesn't repay the loan, the lender can take and sell the collateral to cover the debt. This reduces the lender's risk and increases the chances that the loan will be repaid, or at least some of the money will be recovered. Common examples of collateral include real estate, cars, savings accounts, and stocks. For instance, in a mortgage, the house being bought acts as collateral, and if the borrower can't pay, the lender can foreclose on the house to recover the loan.
Collateral can be either physical (like property or vehicles) or non-physical (like stocks, bonds, or intellectual property). It's important in lending because it lowers the lender's risk, allows borrowers to get larger loans, and usually results in lower interest rates compared to loans without collateral. Collateral is also used in financial markets, like margin trading, to secure borrowed money, and in the cryptocurrency world, where digital assets can be used as collateral for loans.
Collateral plays a key part in finance as it provides security for lenders and helps borrowers get better loan terms. It plays a major role in traditional loans, real estate, and modern markets like decentralized finance (DeFi). By offering collateral, borrowers can get bigger loans or lower interest rates, while lenders have protection if the loan isn't repaid.