What Is Collateral?
collateral is property or other assets that a borrower offers a lender to secure a loan. if the borrower stops making the promised loan payments, the lender ? the collateral to recoup its losses. ? wants to buy a house. the house costs $200,000 but ? only has $40,000. to buy the house, she need a loan from the bank for $160,000. for the bank to lend ? such a large sum, it needs a way to protect itself in case she becomes unable to repay her loan. the bank requires ? to pledge the house as collateral for the loan. as long as ? continues to make her monthly payments, she gets to keep the house, and since the bank can recoup some of its losses by selling the house of ? default's, it's willing to give her a low interest rate of just 4.5%. the day that she pays off all the loan, the home will no longer be collateral and the bank won't have any rights to the house. here's another example. ? wants to open a restaurant but he doesn't have any kitchen equipment. he needs to buy a stove, an oven, a dish washer and more. ? just graduated from ? school and doesn't have much cash, so he takes out a small business loan to pay for these purchases. the bank required ? to pledge his equipment as loan collateral. that way, if his restaurant fails and he can't repay the loan, the bank can sell his equipment and get some of its money back. since his new business is fairly risky, the bank still wants 12% interest, but it is less than the 20% ? would pay if he bought the equipment with a credit card.