Definition: Company or personal assets pledged to the bank in exchange for a loan. If the borrower is unable to pay the loan, the lender can sell the collateral as payment on the loan.

Example: When you get a home mortgage, your house is pledged as collateral on the loan.

Why it’s important: Having collateral increases your ability to get a loan based on the value of that collateral. Pledging collateral on a loan puts that asset at risk if you can’t pay the loan.

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