What does collateral refer to in a loan?

Collateral in the context of a loan refers to an asset that a borrower offers to a lender as security for the loan. This means that if the borrower fails to repay the loan or defaults, the lender has the right to take possession of the collateral to recover the amount owed. This can include property, vehicles, or other valuable assets.

Using collateral reduces the lender's risk, allowing them to offer the borrower more favorable terms, such as lower interest rates compared to unsecured loans. In essence, collateral acts as a guarantee that the lender can reclaim a portion of the loan value in case of non-payment, making it a crucial aspect of secured lending agreements.