Collateral is security for a loan. A borrower pledges something valuable, such as property or inventory, so the lender has a fallback if payments stop. Secured loans usually carry lower interest than unsecured ones because the lender’s risk of total loss is smaller.

Key takeaways

  • If you default, the lender may take and sell the collateral under the loan contract and law.
  • The loan amount is often a fraction of the collateral’s appraised value.
  • Falling collateral values can trigger margin calls or demands for extra security.
  • Not all credit requires collateral; unsecured lending prices risk into the rate instead.