Collateral refers to an asset or property that is pledged as security for a loan or other financial obligation.
The collateral provides a lender with a form of protection in case the borrower is unable to repay the loan, as the lender may seize the collateral and sell it to recoup some or all of the amount owed. Common examples of collateral include real estate, vehicles, stocks, and other financial assets.
When a borrower applies for a loan, the lender will often require collateral to secure the loan and reduce their risk of loss. The value of the collateral is typically assessed by the lender to determine the amount of the loan that can be approved.
Bookkeeping Practices To Keep Your Business Fit
Collateral is often used in secured loans, such as mortgages and car loans, where the collateral serves as security for the loan. Collateral may also be required for unsecured loans, such as personal loans or business loans, to provide additional security for the lender and potentially reduce the interest rate or other terms of the loan.
It also serves as a form of protection for the lender and can be utilized in various ways. Here are some common uses of collateral:
- To secure loans
- Business financing
- To obtain surety bonds
- To obtain credit cards (depends on the financial institution)
- Trade financing
