Written by True Tamplin, BSc, CEPF®

Reviewed by Editorial Team

Updated on March 10, 2023

Collateral Meaning

Collateral is any asset offered by a borrower as security for a loan.

In the event that the borrower is unable to pay back the loan, the lender may seize the collateral in an attempt to recoup some or all of the loan amount.

A lender's claim to collateral is called a lien.

Although it is typical for the asset being borrowed against to be put up as collateral, a variety of assets may be offered as collateral—including real estate, vehicles, and even heirlooms with monetary value.

What Is Collateral?

If a loan is secured by collateral, it is usually offered at a lower interest rate.

The purpose of collateralized loans, therefore, is to make secured loans less risky to lenders, and more affordable to borrowers.

However, defaulting on a collateralized loan is more costly than defaulting on a normal loan because the assets securing the loan will be repossessed by the creditor.

When considering a collateralized loan, borrowers should only work with trusted financial institutions.

Examples of Collateral Loans

Some common examples of collateralized loans are home mortgages or car loans in which the house or car is used as collateral.

Many institutions also accept bank savings deposits, investment accounts, and even future paychecks as collateral.

Borrowers should be careful before taking on a collateralized loan, as "predatory lending" has caused borrowers to unnecessarily lose assets, which is especially common with payday loans.

Collateral FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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