Glossary

Collateral is an asset or property that a borrower pledges to a lender as security for a loan.

In the event the borrower fails to repay the loan, the lender has the legal right to seize the collateral and sell it to recoup their losses. Collateral can include real estate, vehicles, stocks, bonds, or other valuable assets. 🏠💼

For example, when taking out a mortgage, a homebuyer pledges their house as collateral. If the homebuyer defaults on the mortgage, the lender can foreclose on the house and sell it to recover the outstanding loan amount.

Fun fact: In some cultures, borrowers use unconventional collateral like livestock or crops to secure loans. These forms of collateral are particularly prevalent in micro-financing, which aims to provide financial services to underserved populations. 🐄🌾