Collateral Definition

Collateral is an asset offered as security against a loan. If the loan is not repaid, the collateral asset is forfeited to the lender to satisfy all or part of the loan. In a mortgage, the collateral is the real estate itself. In an automobile loan, the collateral is usually the automobile itself. Loans issued to acquire assets such as furniture are often secured against the furniture itself, which is therefore the collateral. Some loans are issued with unrelated assets as collateral. In a less formal sense, collateral assets can be used to ensure good behavior. For example, you might say to a forgetful visiting relative "You may borrow my cell phone, but I’ll hold on to your car keys until my phone is returned."