Collateral

Meaning:

Collateral is an asset or property pledged as security to a lender in exchange for a loan. If the borrower fails to repay the loan, the lender has the legal right to seize or sell the collateral to recover the money lent.

Example:

For instance, when you take a home loan, the house itself acts as collateral. If you fail to repay, the bank can take possession of the house.

How to understand collateral

• For instance, when you take a home loan, the house itself acts as collateral. If you fail to repay, the bank can take possession of the house.
• Collateral can be movable or immovable property, and its value usually matches or exceeds the loan amount.

Types of Collateral:

• Real Estate Collateral: Houses, land, or buildings.
• Financial Collateral: Fixed deposits, bonds, or shares.
  
• Movable Collateral: Vehicles, gold, or machinery.
  
• Personal Guarantees: Co-signers who promise to repay the loan.
  
• Inventory / Receivables: Goods held for sale or unpaid customer invoices.
  

Importance of Collateral:

• It reduces the lender’s risk by allowing them to recover the loan amount if the borrower defaults.
• Collateral enables individuals and businesses to access secured loans with lower interest rates.