Collateral Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Collateral, written in plain English, along with examples of how it is used.
What is Collateral?
Indirectly related or existing side by side. 1)Property offered as a guarantee to obtain a loan,payment of debts or any form of security can be taken away if the payment of money is not made on time. 2)It also refers to certain legal issues that are indirectly related to a case which have no direct releavance but should be taken into consideartin while making a decision.
History and Meaning of Collateral
Collateral, in its simplest sense, refers to assets or properties that are pledged as security for repayment of a loan or any other type of financial obligation. The history of the use of collateral can be traced back to early civilization, where people used to pledge their land or even their own physical bodies as collateral for loans. Today, collateral is a common feature of the banking and financial services industry, with banks often requiring collateral to mitigate the risks associated with lending.
Examples of Collateral
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When a person takes out a mortgage to buy a house, the property that is being purchased itself serves as collateral, securing the loan.
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Small businesses securing a loan from the bank may pledge assets such as inventory, equipment, or accounts receivables as collateral.
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In the case of a car loan, the car serves as collateral, and the lender may repossess the car if the borrower defaults on payments.
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Some lenders may accept personal property, such as jewelry or artwork, as collateral for a loan.
Legal Terms Similar to Collateral
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Security interest: refers to a legal right granted to a creditor or lender over a debtor's property, such as assets, investments or accounts receivable.
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Lien: a legal claim or interest that a lender has in a property until the loan is repaid in full.
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Mortgage: a specific type of loan in which the borrower pledges the property being purchased as collateral to secure the loan.
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Guarantee: a promise or assurance made by a person or entity to be held responsible for the repayment of a loan or debt in case the borrower defaults.
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Bailment: the transfer of possession (but not necessarily ownership) of personal property from one person (the bailor) to another (the bailee) who shall retain possession of the property for a certain period of time.