collateral

Collateral is an item of value, such as property or assets , that is pledged by an individual (borrower) in order to guaranty a loan . Upon default , the collateral becomes subject to seizure by the lender and may be sold to satisfy the debt . The value of collateral is not based on the market value . It is discounted to take into account the value that would be lost if the assets had to be liquidated in order to pay off the loan.

For example, in securing a mortgage , the borrower’s home becomes the collateral. If the borrower takes out a car loan, then the car becomes the collateral for the loan.

[Last reviewed in July of 2022 by the Wex Definitions Team ]

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