What Is Collateral?
Collateral is an asset a borrower pledges to a lender as security for a loan. If the loan is not repaid as agreed, the lender has a legal right to take and sell the collateral to recover the money. Homes, vehicles, savings deposits, and business equipment are common forms of collateral.
How Collateral Affects a Loan
Lenders compare the loan amount with the collateral's value, often using the loan-to-value ratio. More collateral relative to the loan generally means lower risk for the lender.
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🔗 Related Terms
More Loans & Credit Terms
- Amortization
- APR (Annual Percentage Rate)
- Auto Loan
- Balance Transfer
- Balloon Payment
- Buy Now, Pay Later (BNPL)
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Last updated: September 27, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.