A borrower’s pledge of a property to a lending bank in order to secure repayment of a loan. In this sense, the collateral helps protect a bank against default by borrowers- that is, in case they fail to pay the principal and interest on a timely basis as set out in the loan contract. If a borrower fails to service a loan due to financial distress or insolvency, then the property pledged as collateral will be forfeited to the bank, which then has the right to dispose of it and redeem its dues out of the sale proceeds. In the context of banking, collateral implies secured lending (asset-backed lending), where the use of collateral (in any acceptable form: such as against a property, source of revenue or income, valuables, securities holdings, etc) in some economies is the only way to have access to bank financing.
Banking
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