Collateral

Collateral refers to an asset or property that a borrower offers to a lender as security for a loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recover their losses. Common examples include a house in a mortgage or a car in an auto loan. This arrangement reduces the lender's risk, making it easier for borrowers to obtain loans, often at lower interest rates, because the lender has a safeguard against default. Essentially, collateral provides a safety net for lenders and facilitates borrowing for individuals and businesses.