In lending agreements, collateral is a borrower's asset that is forfeited to the lender if the borrower is insolvent --- that is, unable to pay back the principal and interest on the loan. When insolvent, the borrower is said to default on the loan, in which case the lender becomes the owner of the collateral. In a mortgage, for instance, the real estate being acquired with the help of the loan serves as collateral. A mortgage is the pledging of a property to a Lender as a security for a Mortgage loan. Should the buyer fail to pay mortgage interest, the ownership of the real estate is transferred to the bank in the process known as foreclosure.

Concept of Collateral

Collateral, especially within banking, may traditionally refer to secured lending (also known as asset-based lending) as well as more recently as collateralisation arrangements to secure trade transactions (also known as capital market collateralization). A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money In the simplest meaning asset-based lending is any kind of lending secured by an asset The former often presents unilateral obligations, secured in the form of property, surety, guarantee or other as collateral (originally denoted by the term security), whereas the latter often presents bilateral obligations secured by more liquid assets such as cash or securities, often known as margin. Property is any physical or virtual entity that is owned by an individual A surety is a person who agrees to be responsible for the Debt or obligation of another A surety is a person who agrees to be responsible for the Debt or obligation of another Cash usually refers to Money in the form of Currency, such as Banknotes and Coins In Bookkeeping and Finance, A security is a Fungible, Negotiable instrument representing financial value In finance a margin is collateral that the holder of a position in securities, options, or Futures contracts has to deposit to cover Another example might be to ask for collateral in exchange for holding something of value until it is returned (ie, I'll hold onto your wallet while you borrow my cell phone).

In many developing countries, the use of collateral is the main way to secure bank financing. The ease of acquiring a loan depends on the ability to use assets, whether real estate or any other, as collateral.

See also

• Security interest
• Credit Risk
• Hypothecation
• Cross-collateralization