What is a Collateral
Wednesday, June 18th, 2008In lending agreements, collateral is a borrower’s asset that is forfeited to the lender if the borrower is insolvent — that is, unable to pay back the principal and interest on the loan. When insolvent, the borrower is said to default on the loan, in which case the lender becomes the owner of the collateral. In a mortgage, for instance, the real estate being acquired with the help of the loan serves as collateral. Should the buyer fail to pay mortgage interest, the ownership of the real estate is transferred to the bank in the process known as foreclosure.