Definition: Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. Collateral offers security to lender as if the borrower fails to repay the loan, the lender can use the underlying collateral to recover the loss. Loans pledged with a collateral generally carries a lower rate of interest. This loan is also referred to as 'collaterlaized loan'

Example: The family pledges their home as a collateral to seek a secured loan to start a business despite having a stellar credit rating as the rate of interest on an unsecured loan was very high. 

Business Insight:  The value of collateral to be pledged against a loan depends on the lenders Collateral Coverage Ratio (CCR). A coverage ratio of 1.0 would mean the value of loan is equal to the appraised or discounted value of the pledged asset. CCR is calculated by the value of collateral divided by the loan amount.