What Is Collateral?

by Craig Anthony

0 min read

Collateral refers to property or assets used to secure a loan. For example, a house acts as collateral on a mortgage. Small business owners may secure business loans with personal property or with the asset they purchased with the loan; if they default on the loan, the lender may repossess the asset.

If a loan is not backed by collateral, it is unsecured. For example, most credit cards are unsecured loans, meaning that they are not backed by collateral. In some cases, securing a loan with collateral can make it easier to obtain or can lower the interest rate.

New types of loans allow business owners to use inventory as collateral. In this case, the value of the underlying asset changes as the business owner sells and restocks the inventory. However, that is part of the agreement.

References & Resources

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