Collateral
Collateral is an asset a borrower pledges to back a loan. If the borrower fails to repay, the lender can take the asset and sell it to recover the debt. A home can be collateral for a mortgage, a car for an auto loan, or inventory and accounts receivable for a business loan. Because collateral lowers the lender’s risk, secured loans often have lower interest rates than unsecured loans. The tradeoff is that the borrower can lose the asset.
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