Collateral

Collateral refers to an asset or property pledged as security for a loan or credit, ensuring repayment by the borrower. It serves as a safeguard for lenders against default, as they can take possession of the collateral if the borrower fails to meet their obligations. The term can also denote accompanying or supplementary aspects, as in 'collateral benefits' in broader contexts.

Collateral meaning with examples

• When applying for a mortgage, homeowners often use their property as collateral, so lenders feel secure about the investment. By providing collateral, borrowers demonstrate their commitment to repaying the loan, making it easier for them to secure favorable mortgage terms that can save them money long-term.
• During business negotiations, the startup offered company assets as collateral to secure funding. Investors were encouraged by the prospect of reclaiming the assets if the company failed to perform. Ultimately, this collateral arrangement helped bridge the gap between risk and reward, allowing both parties to proceed with greater confidence.
• In the context of personal loans, some individuals use vehicles as collateral to obtain a lower interest rate. Lenders often accept cars as a secure form of collateral, as they can resell the vehicle to recover losses in case of loan default. This allows borrowers to access funds they might otherwise struggle to obtain.
• The bank required collateral for the business loan application, necessitating a detailed valuation of the equipment. The entrepreneur understood that providing adequate collateral would not only increase the chance of approval but also possibly lead to better borrowing terms, allowing her company to grow and thrive.
• In international relations, collateral damage refers to unintended harm to non-combatants during military operations. While the primary objective may focus on eliminating a threat, collateral damage highlights the moral and ethical considerations, prompting discussions on the need for careful planning to minimize unintended casualties.