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Definition - What does Collateral mean?

Collateral is something valuable that is offered to a lender as a form of insurance that a borrower will come good on his or her loan. In other words, by offering collateral, the borrower guarantees that the lender will recoup the value that he/she gave out in the loan, even if the borrower fails to make the repayments. If the borrower fails to make the repayments, the lender simply keeps the collateral, and the debt is paid in this way.

Justipedia explains Collateral

A loan that has a collateral component is called a secured loan. It is "secured" because the lender will get his/her money back if the borrower repays the loan or not. Secured loans are helpful for small businesses that represent a higher risk to banks or other lenders. The reason is because putting up collateral, such as assets of the company, can help the bank feel safe to give the loan. Without collateral, the bank may only choose to loan money to midsize or larger companies that represent smaller risks due to proven economic success.

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