Collateral

Collateral refers to an Asset or property that a borrower offers to a lender to secure a loan. The collateral acts as a form of security for the lender, ensuring that they can recoup their losses in case the borrower defaults on the loan. If the borrower fails to repay, the lender has the right to seize the collateral.

Examples:

• In a mortgage, the property itself serves as collateral. If the homeowner fails to make mortgage payments, the lender can foreclose on the property.
• A car loan often uses the vehicle as collateral. If the borrower defaults, the lender can repossess the car.
• Business loans might require Inventory or equipment as collateral, allowing the lender to take possession of these Assets if the business fails to repay the loan.

Cases:

• In the case of Bank of America v. Caulkett, the court ruled that a second mortgage could not be stripped away if there was no Equity in the collateral property.
• The case of In re: Safeway involved a lender claiming collateral rights over certain Assets of a bankrupt company to recover owed debts.