What is collateral?

Collateral is real property (a house or land, for example) or personal property (an automobile or bank account, for example) pledged to ensure that a debt is repaid. For example, a car can serve as collateral to secure payment of the loan used to buy the car. Most people who buy cars do not have enough money to pay the purchase price in full. Therefore, they borrow the money from either the car manufacturer or a bank. The buyer pledges the car to assure the lender that the loan will be repaid. Pledging the car as collateral for the loan gives the lender the ability to take the car away from the buyer if the buyer fails to repay the loan. If the lender has to repossess (take back) the car because the buyer fails to pay the loan, the lender can sell the car and use the proceeds to pay off the loan. If the sale does not provide enough money to pay off the loan (and the costs associated with the sale), the buyer still is responsible for the deficit.