Glossary
What is Collateral?
Definition
Collateral is an asset a borrower pledges to secure a loan, such as a vehicle, land, equipment or savings. If the borrower defaults, the lender may take and sell the asset, subject to the law and the loan agreement, to recover what is owed. A loan backed by collateral is a secured loan.
Good collateral is owned by the borrower, free of other claims, realistically valued, easy to sell, durable and insurable. Because forced sales usually fetch less than normal sales, lenders often require collateral worth more than the loan.
Collateral is a second line of defence, not a substitute for assessing repayment ability. Record the value, identifying numbers, insurance and status of every asset against the loan, and take legal advice before enforcing security, since repossession is tightly regulated in many places.
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