📝 Definition:
A collateral is something valuable, like money or property, that you promise to give someone if you can’t pay back a loan.
It’s like a security deposit you leave with a landlord, which you get back if everything is okay when you move out.
🔑 Key Features:
- Security for Loans: Collateral makes lenders feel safer about giving you money.
- Can Be Various Assets: It can be cash, property, or other valuable things.
- Risk of Loss: If you can’t pay the loan, the lender can take your collateral.
⚙️ How It Works:
- Agreement: You agree to give something valuable as collateral when you take a loan.
- Holding: The lender holds onto the collateral or has a legal right to it until the loan is paid back.
- Return or Seize: Once you pay back the loan, you get your collateral back. If you can’t pay, the lender keeps or sells it.
💡 Applications:
- Business Loans: Companies might put up their equipment or buildings as collateral.
- Personal Loans: People might use their car or home as collateral for personal loans.
- Crypto Loans: In the crypto world, you can use digital currencies as collateral for borrowing money.
🔍 Example:
Imagine you want to borrow a Lamborghini from your friend, but he wants to be sure you’ll return it.
So, he asks you to leave your luxury watch as a guarantee.
f you return the Lamborghini on time, you get your watch back.
If not, he keeps it to cover the loss.
This is just like collateral in finance: you give something valuable to secure a loan, and this protects the lender in case you can't pay him back.