Collateral

Meaning:

Collateral is an asset or property that you give to a lender as security for a loan. If you don’t pay back the loan, the lender can take or sell the collateral to get their money back

Example:

When you take a home loan, the house itself becomes the collateral. If you don’t repay, the bank can take possession of it.

How to understand collateral

1. Collateral acts as a guarantee that you will repay the loan. 
2. It helps lenders feel safer about giving loans, especially for big amounts.
   

Importance of Collateral:

• It reduces the risk for lenders by allowing them to recover their money if you can't pay back the loan.
• It helps you borrow money more easily since it shows you are serious about repaying.