Collateral

Collateral is an asset pledged to secure a loan. If the borrower defaults, the lender may seize or sell it under the loan agreement and applicable law.

Secured debt: Debt backed by a creditor’s claim on specified property if the borrower fails to pay. Collateral is the property that gives secured debt its claim beyond the borrower’s general promise to repay.
Lien: A legal claim against property that secures payment of a debt or fulfillment of an obligation. A lien is a common legal form through which a creditor’s claim attaches to collateral.
Mortgage loan: A loan secured by real estate, with the property serving as collateral. A home or other real estate is the defining collateral in a mortgage loan.
Unsecured debt: Debt that is not backed by a claim on specified property. Unsecured lenders lack a designated asset to seize when a borrower defaults.
Security interest: A legal interest in property that secures payment or performance of an obligation. A security interest establishes the lender’s rights in pledged collateral.
Pledge (law): A legal arrangement in which property is delivered or committed as security for an obligation. The pledge describes the act of providing collateral, especially when possession changes hands.
Pawnbroking: Short-term lending secured by valuable items deposited with a pawnbroker. Pawnbroking makes the collateral relationship especially direct: the lender holds the pledged item.
Guarantee: A promise by one party to answer for another party’s debt or obligation if needed. A guarantee adds another person’s promise rather than pledging an asset.
Loan-to-value ratio: The ratio of a loan’s amount to the value of the asset securing it. Lenders use this ratio to limit borrowing against collateral and buffer against falling values.
Perfection (law): The steps required to make a security interest effective against competing claimants. Perfection helps establish a lender’s priority in collateral against other creditors.

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