What is Collateral?

By BYJU'S Exam Prep

Updated on: September 25th, 2023

When borrowing a loan from a bank or any financial institution, an integral part is a collateral. But what is collateral? Collateral can be defined as a financial asset the lender can accept as security for the loan. Thus, it is basically a security measure for the lender or financial institution. It is an asset like property or physical wealth like a house, car and livestock that the borrower possesses and can take a loan against. Hence, if the borrower fails to repay the loan on time, the lender can take possession of the collateral as payment for the loan amount.


Collateral is a financial asset that the lender can accept as security for a loan

Furthermore, the collateral minimises the risk for the lender as they can seize it to pay for the loan amount if the borrower fails to repay the loan. The lender determines whether the borrower has the ability to repay the loan before lending the amount. Hence, they ask for some form of collateral.


What is Collateral?

Collateral can be described as a financial asset possessed by the borrower that can act as security for the lender. Hence, if you wish to borrow a loan for any purpose, you must be able to pay some collateral or security to the lender.

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