Collateral is the name for an item that a lender will accept as security for a loan. Depending on the loan’s purpose, real estate or other assets may be used as collateral. The collateral acts as an insurance policy for the lender. In other words, if the borrower misses a payment on the loan, the lender may sell the collateral to collect part or all of its losses.
You must be able to repay any loans you receive before the lender gives them to you. Because of this, many of them need security of some kind. Lenders lower their risk by using collateral as security.
It assists borrowers in fulfilling their financial obligations. If the borrower does fall behind on loan, the lender has the right to take the collateral, sell it, and use the proceeds to cover the outstanding balance. To recover any outstanding debt, the lender may decide to file a lawsuit against the borrower.