Collateral

Collateral is property promised to a lender as backup. If you default, the lender can take it and sell it to recover what it is owed. A loan backed this way is called secured; one backed only by your promise to repay is unsecured.

The distinction sets the price. Because collateral limits the lender's downside, secured borrowing is dramatically cheaper — mortgages and auto loans, secured by the home and the car, carry rates a fraction of what credit cards charge on the same credit profile.

It also sets the stakes. An unsecured default wrecks your credit and invites collection; a secured default costs you the asset. That is the real trade in a home equity loan or a HELOC: you are converting expensive unsecured debt into cheap debt by putting your house behind it.

Seizure has a name that depends on the asset. Repossession covers vehicles and equipment; foreclosure covers real estate. Selling the collateral does not always end the matter — if it fetches less than the balance, some states allow the lender to pursue the shortfall as a deficiency.

Lenders rarely lend the full value of what is pledged. The gap between an asset's worth and the amount advanced against it is the lender's cushion against a falling market, and it is why a home appraisal or a vehicle valuation is part of underwriting.