In
lending agreements,
collateral is a
borrower's pledge of specific
property to a
lender, to
secure repayment of a loan. The collateral serves as protection for a lender against a borrower's
default—that is, it can be used to offset the loan to any borrower failing to pay the
principal and
interest under the terms of a loan obligation. If a borrower does default on a loan (due to
insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral, with the lender then becoming the owner of the property. In a typical
mortgage loan transaction, for instance, the
real estate being acquired with the help of the loan serves as collateral. Should the buyer fail to pay the loan under the mortgage loan agreement, the ownership of the real estate is transferred to the
bank. The bank uses the
legal process of
foreclosure to obtain real estate from a borrower who defaults on a mortgage loan obligation. A
pawnbroker is an easy and common example of a business that may accept a wide range of items as collateral rather than accepting only cash.