Collateral. An asset offered as security, pledged as an inducement to another party, to lend money, extend credit, or provision securities.
The property or other assets that a borrower or a third party offers a lender to secure a loan or extension of credit. If the borrower stops making the promised repayments and/or interest and finance charges, the lender can take possession of the collateral to recoup its losses by means of sale.
The legal perfection of collateral is jurisdictionally specific and takes many forms. Collateral is often subject to Collateral Management procedures, e.g. collateral in a warehouse. Collateral has synonyms in the form of Security or a security interest
Lenders or other counterparties are typically accepting collateral as a form to Risk Mitigation rather than due to intrinsic interest in the use of the asset. Hence the topic of Collateral Valuation, which allows the comparison of the collateral's monetary value against the liabilities of the borrower is quite significant.
There is a wide range of possible collateral types, including marketable properties, such as real estate, chattel, inventories, and financial institution deposits.
- Collateral is also terminology used to describe underlying assets in Securitisation
- Barron's Dictionary of Business and Economics Terms, Fifth Edition, 2012
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