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Collateral

A borrower’s pledge of a property to a lender or creditor in order to secure repayment of a loan or obligation. In this sense, the collateral helps protect a lender/creditor against default by borrowers/debtors- that is, in case they fail to pay the principal and interest on a timely basis as set out in the lending 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 lender, i.e. he has it in his possession, holding whereby the right to dispose of it and redeem his dues out of the sale proceeds.


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