Collateral

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What is 'Collateral'

Collateral is a 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.

BREAKING DOWN '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.

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