What is collateral in the context of a loan?

Collateral refers to an asset or something of value that a borrower pledges to a lender as a security for a loan. This means that if the borrower fails to repay the loan, the lender has the right to claim the collateral as a way to recover some or all of the outstanding debt. This practice reduces the lender's risk, as they have a tangible asset to fall back on in case of default.

In the context of loans, collateral can take various forms, such as real estate, vehicles, or savings accounts, providing a layer of assurance to the lender that the borrower is committed to repaying the loan. Thus, collateral is a critical concept that plays a significant role in many lending agreements, especially for secured loans. The other choices represent different concepts related to loans but do not accurately capture the definition of collateral.