Collateral is simply an asset, such as a car or home, that a borrower offers up as a way to qualify for a particular loan. Collateral can make a lender more comfortable extending the loan since it protects their financial stake if the borrower ultimately fails to repay the loan in full.

Why does the lender want collateral?

Lenders use collateral to reduce the risk of losing money on the loan. The amount of collateral needed varies based on several factors, including your credit rating, the type of lender and the nature of the collateral. Some lenders will allow or require borrowers to pledge personal assets to secure a business loan.

Why is collateral bad?

You can lose the collateral if you don't pay the loan back.

The biggest risk of a collateral loan is you could lose the asset if you fail to repay the loan. It's especially risky if you secure the loan with a highly valuable asset, such as your home.