Collateral is property used to secure payment or performance of an obligation.
In plain language, it is the property a creditor may look to if the debtor defaults. Collateral can include equipment, inventory, accounts, vehicles, deposit accounts, fixtures, or other property depending on the transaction.
Why it matters
Collateral matters because it affects creditor risk and debtor flexibility. A secured party may have rights against collateral that unsecured creditors do not have.
The term is important in commercial loans, secured transactions, bankruptcy, default, and priority disputes.
Where it appears
Collateral appears in security agreements, financing statements, loan documents, equipment financing, inventory lending, bankruptcy schedules, and default notices.
Practical example
A business borrows money and grants the lender a security interest in its delivery vans. The vans are collateral for the loan.
How it differs from nearby terms
Collateral differs from a security agreement. The security agreement grants rights; collateral is the property subject to those rights.
It also differs from a lien, which is a legal claim or charge against property.
Related terms
Quick knowledge check
Question: What is collateral used for?
Answer: It secures payment or performance of an obligation.