Money 101  >  Dictionary


POSTED ON September 03, 2019

How finance folk use it

Collateral is a term referring to anything that’s used to get a loan. If you can’t pay back your loan, your collateral can be taken from you. The way to get it back is by paying everything you owe.

Things like cars, bank accounts, jewelry, and even investments can be used as collateral. If it’s a house, it’s more often called a mortgage. If it’s a car, the more common term is chattel. However, they all refer to collateral.

Is it good or bad?

Collateral is something you provide to moneylenders so you are incentivized to pay your loan. Loans with collateral usually have a lower interest rate than those without.

What it means for you

You can use collateral to your advantage. If you offer collateral that’s high in value, you have a good chance of getting a lower interest rate. However, you should also be confident that you can pay back the loan when it’s due. Otherwise, you risk losing something valuable. And if you set an investment as collateral, you also risk losing the chance to grow your money.