what is collateral security

Collateral security is an asset that a borrower pledges as security for a loan. It is a valuable asset that reduces the risk for lenders by ensuring that the borrower keeps up with their financial obligation. If a borrower defaults on the loan, the lender can seize the collateral and sell it to recoup its losses. Collateral can be any asset that has value, such as a home, car, savings account, or investment account. The use of collateral reduces repayment risk for the lender, and loans secured with collateral typically have better payment terms and lower interest rates than unsecured loans. Different types of collateral are used for different types of loans, such as inventory and accounts receivable for operating loans, vehicles and equipment for demand loans, and land and buildings for term loans. Before a lender issues a loan, it wants to know that the borrower has the ability to repay it, and collateral is a form of security that minimizes the risk for lenders.