Dictionary of Banking Terms for: collateral

asset pledged as security to ensure payment or performance of an obligation. In bank lending, it is generally something of value owned by the borrower. If the borrower defaults, the asset pledged may be taken and sold by the lender to fulfill completion of the original contract. Four types of collateral, as recognized by the Uniform Commercial Code, are commonly used in secured lending: (1) trade goods, (2) paper (negotiable instruments and title documents), (3) intangibles, and (4) business proceeds (cash). Collateral assigned to the lender can even be the asset being financed, as in asset-based lending, where a loan might be secured by business inventory or accounts receivable. In a home mortgage loan, the borrower gives the lender a mortgage on the house being purchased.

When bank assets are securitized, or converted into marketable securities in the secondary market, the principal and interest payments serve as collateral for the securities offered for sale to investors.

Dictionary of Business Terms for: collateral
  1. secondary; on the side.
  2. in commercial transactions, the property offered as security, usually as an inducement to another party, to lend money or extend credit.
Dictionary of Real Estate Terms for: collateral

property pledged as security for a debt.

Example: A borrower who arranges a mortgage loan pledges the property as collateral.

Copyright (c) by Barron's Educational Series. Reprinted by arrangement with the publisher of this site.