COLLATERAL

Any item/asset which accompanies/subordinates/supplements a primary item

is known as collateral. The term is used in banking industry while providing loans. This is also known as ‘secondary/subordinate security’— which borrowers/guarantors provide in the form of an asset (like land, building, etc.) while seeking a loan. The principal/primary security is usually the borrower’s personal guaranty, or the cash flow of a business.

Except for highly creditworthy customers (who can get loans against their signatures), lenders always demand a collateral if the primary security is not considered to be reliable or sufficient enough to recover the loan in case of a default—lenders have the legal right to seize the collateral.