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Collateral is an asset, like a car or house, that a borrower offers to a lender to secure a loan. If the borrower doesn't repay the loan, the lender can take the collateral.
In Depth
Collateral is something of value that you pledge to a lender as security for a loan. If you fail to make your payments, the lender has the right to take possession of the collateral to recover their money. This arrangement makes it less risky for lenders to offer loans, often resulting in better interest rates for the borrower. Common types of collateral include real estate, vehicles, and sometimes even investments or savings accounts. It provides a safety net for the lender in case of default.
Example
When you take out a mortgage, your house serves as collateral for the loan.