Collateral

AAA

DEFINITION of 'Collateral'

Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Because collateral offers some security to the lender in case the borrower fails to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien.

INVESTOPEDIA EXPLAINS 'Collateral'

If you get a mortgage, your collateral would be your house. If you stop making your monthly house payments, the lender can take possession of the home through a process called foreclosure and sell it to get back the principal it lent you. In margin trading, the securities in your account act as collateral in case of a margin call. Similarly, if you were to stop making your payments on an auto loan, the lender would seize your vehicle. When you borrow money with a credit card, however, there is no collateral, so credit card debt carries a significantly higher interest rate than mortgage debt or auto loan debt.

VIDEO

RELATED TERMS
  1. Borrowed Capital

    Funds borrowed from either individuals or institutions. Borrowed ...
  2. Belt And Suspenders

    A term used to mean conservatism and safety in lending practices. ...
  3. Bailment

    The contractual transfer of possession of assets or property ...
  4. Asset-Light Debt

    A corporate debt that has less than the usual amount of collateral, ...
  5. Overcollateralization - OC

    The process of posting more collateral than is needed to obtain ...
  6. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
Related Articles
  1. Insurance

    What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right financial decision.
  2. Retirement

    What are the main benefits of a Locked-in Retirement Account (LIRA)?

    Read about the main benefits you can realize from transferring your Canadian pension funds into a Locked-in Retirement Account, or LIRA.
  3. Credit & Loans

    In what states are high-cost payday loans illegal?

    Learn which states permit high-interest payday loans. Explore the maximum rates permitted to be charged on a state-by-state basis.
  4. Fundamental Analysis

    What are the differences between installment sales and credit sales?

    Determine the differences between credit sales and installment sales, which businesses often offer their customers for deferred payment options.
  5. Active Trading Fundamentals

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  6. Personal Finance

    Promissory Notes: Not Your Average IOU

    These may be a handy way to borrow money, but this convenience does not come without risk.
  7. Retirement

    Getting A Loan Without Your Parents

    Use the 5 "W"s to finance your dreams without banking on a second signature.
  8. Options & Futures

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  9. Trading Strategies

    What is the haircut rate imposed by clearing corporations?

    A haircut rate is a measure that reduces the value of any collateral used in a loan to ensure that when the effects of volatility and adverse price changes are taken into consideration, the collateral ...
  10. Retirement

    Can an IRA be used as security for a loan?

    The IRS prohibits the use of an IRA as security for a loan. If an individual borrows money against his or her IRA, the IRA ceases to be an IRA as of the first day of the year in which the transaction ...

You May Also Like

Hot Definitions
  1. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  2. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  3. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  4. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
Trading Center