What is collateral in a secured transaction?

In a secured transaction, collateral refers to a valuable object or asset that a borrower offers to a lender to secure a loan. This asset provides the lender with a form of protection in case the borrower defaults on their repayment obligations. If the borrower fails to meet the terms of the loan, the lender has the right to seize the collateral to recover some or all of the outstanding debt.

Collateral can take several forms, including real estate, vehicles, equipment, or other tangible assets. The presence of collateral reduces the risk for the lender, often allowing the borrower to access loans at potentially lower interest rates compared to unsecured loans, where no collateral is required. This arrangement benefits both parties; the lender has assurance against loss, and the borrower may receive more favorable loan terms.

Understanding collateral is crucial in secured transactions, as it directly influences the risk assessment and decision-making process for lenders when extending credit.