Collateral
Definition
An asset pledged by a borrower to a lender as security for a loan, which can be seized if the borrower defaults.
Collateral is property or assets that a borrower offers to a lender to secure a loan. If the borrower fails to repay, the lender has the legal right to seize and sell the collateral to recover the outstanding debt. Common examples include homes for mortgages, vehicles for auto loans, and business equipment for commercial loans.
Secured loans backed by collateral typically carry lower interest rates than unsecured loans because the lender has reduced risk. The loan-to-value ratio determines how much a lender will loan against the collateral's value, usually 70% to 90% depending on the asset type.
Understanding collateral requirements is essential when seeking financing. The value and type of collateral can significantly impact loan terms, interest rates, and approval odds. Some lenders accept non-traditional collateral like investment accounts, certificates of deposit, or even intellectual property.
Related Calculators
Related Terms
Loan-to-Value Ratio (LTV)
financeThe ratio of a loan amount to the appraised value of the asset being purchased, expressed as a percentage.
Mortgage
financeA loan used to purchase real estate, where the property itself serves as collateral for the debt.
Foreclosure
financeThe legal process by which a lender seizes and sells a property when the borrower fails to make mortgage payments.
Underwriting
financeThe process by which a lender or insurer evaluates the risk of extending credit or coverage, determining terms and pricing.
Related Articles
How to Calculate Mortgage Payments: Complete Guide
Learn how to calculate your monthly mortgage payment with the amortization formula. Includes examples, tips for getting lower rates, and a free calculator.
Compound Interest Explained: How Your Money Grows Exponentially
Understand compound interest and how it makes your money grow exponentially. Learn the formula, see real examples, and discover strategies to maximize compound growth.
How to Pay Off Debt Fast: Snowball vs Avalanche Method
Learn the two proven strategies to pay off debt fast. Compare the debt snowball and debt avalanche methods with real examples and find which approach works best for you.
How to Calculate Net Worth: Assets, Liabilities & Benchmarks
Learn how to calculate your net worth step by step. Discover what to include as assets and liabilities, and see how your net worth compares to others your age.