Collateral definition
/What is Collateral?
Collateral is an asset or group of assets that a borrower or guarantor has pledged as security for a loan. The lender has the legal right to seize and sell the asset(s) if the borrower is unable to pay back the loan by the agreed date. In many cases, it is not possible for a borrower to obtain a loan without collateral.
Examples of Collateral
Here are several examples of collateral in lending situations:
A house bought with a mortgage.
The vehicle associated with a car lease.
A boat acquired with a personal loan.
An office building used to secure a business loan.
Agricultural land pledged as collateral on a loan.
A certificate of deposit that has been pledged as collateral on a loan.
Inventory that has been pledged against a business loan.
Trade receivables that secure an advance of funds from a factor.
The cash value of a whole life insurance policy that is used as collateral in a lending arrangement.
A vintage car that is used as collateral on a personal loan.
Advantages of Collateral
There are several advantages to the use of collateral. Because of the extra security provided to the lender by having collateral, the amount borrowed may be higher and/or the associated interest rate may be reduced. From the perspective of the lender, collateral reduces the risk of loss on funds loaned to other parties.
Is There Collateral on Credit Card Debt?
There is no collateral associated with credit card debt. This (in part) explains the high interest rates charged by credit card providers, since they must recoup their losses on unpaid credit card debts from the high profits on this type of financing.