What is Collateral?

Collateral is an asset/property that a borrower commits to a lender in exchange for a loan, which will be forfeited if the borrower defaults.

A loan that has collateral attached to it will generally carry a more favorable interest rate, but that is not necessarily always the case. Some examples of collateral are a house when you take out a mortgage, your car when you take out an auto loan, or the stocks in your portfolio if you take your account on margin.

Typically the terms of the loan or the margin agreement will specify when the lender has the ability to claim collateral.