Collateral
Explanation: Collateral is an asset that a borrower offers to a lender to secure a loan. If the borrower defaults on the loan, the lender has the right to seize the collateral to recover the outstanding loan amount. Common forms of collateral include real estate, vehicles, and financial assets. Collateral reduces the lender’s risk and can result in more favorable loan terms for the borrower.
Example: A homeowner applies for a $200,000 mortgage and offers the house as collateral. If the borrower fails to make mortgage payments, the lender can foreclose on the house to recover the loan amount.
Reference Link: For more information on collateral, visit Investopedia’s Collateral.
FAQs:
- What types of assets can be used as collateral?
- Assets such as real estate, vehicles, stocks, bonds, and cash can be used as collateral.
- Why do lenders require collateral?
- Collateral reduces the lender’s risk by providing a security interest in the borrower’s asset, which can be seized in case of default.
- Can collateral be reused for multiple loans?
- Generally, an asset can only secure one loan at a time unless the lender agrees to a subordinate lien.
- What happens to the collateral if the loan is repaid in full?
- Once the loan is repaid, the lender releases the claim on the collateral, and the borrower retains full ownership.
- Are all loans secured by collateral?
- No, some loans, like personal loans and credit cards, are unsecured and do not require collateral.