Collateral

Collateral is the term generally given to tangible assets which might include things like: inventory, real estate, items and equipment, physical things in general.

Sometimes the term collateral might be applied to things like company names and patents, these things being intangible assets.

This term can be called upon when referring to anything set forth in a loan agreement. For example, if organizing a secured loan, one might be required to name the collateral which the loan is being requested for or is in place of. The borrower’s guarantee will then be required to verify this.

Regardless of the amount or type of collateral being processed for the loan, the person doing the lending will almost always ask for an appraisal of the assets in question, often from a national or recognized appraisal firm.

So, collateral is used in lending agreements and is the borrower’s pledge of a certain type of property or asset which is used to secure repayment of a loan, or a guarantee that the loan will definitely get repaid, if you will, as it serves as protection against the borrower failing to pay the borrowed amount (plus any interest that might have been incurred).

If the borrower cannot complete payments on the loan, then they forfeit whatever collateral was stated upon the initial loan agreement.