Collateral refers to a property or any asset that a borrower offers to the lender for securing a loan. If the borrower stops making the promised loan payments, the lender can take hold of the collateral to recover his losses. A lender's claim to a borrower's collateral is called a lien.

Loans that have collateral security are charged a lesser rate of interest as compared to unsecured loans as the collateral security makes the risk of loss to the lender lower.