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If a loan is not repaid, the collateral of the borrower, used as security for the debt, could be sold by the lender.
In financial terms, collateral refers to a valuable asset that a borrower pledges as security for a loan. It means that collateral is an element of value pledged to secure a loan. Collateral offers a way to reduce the risk for lenders. In case a borrower becomes a defaulter on the loan, the lender can seize the collateral and sell it to recoup their losses. A loan amount that is secured by collateral offers a lower interest rate than an unsecured loan. Car loans and mortgages are two types of collateralized loans.
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