Collateral (shortened from collateral security, see Webster n.2) in the world of finance, is used to mean an offer of guarantee for a contractual transaction, in the form of payment in another kind in lieu of fufilment of the contractual obligations.

Everyday examples of collateral:

  • If you cannot make your mortgage repayments, your house will be reposessed.
  • Similarly, a leased company car may be reposessed by the leasing company in the advent of chapter 11.
  • When finding oneself in a restaurant or taxi without the means to pay, an option is to offer an item of collateral worth more than the amount owed (usually jewellery or consumer goods like a cellphone) while disappearing to a cash dispenser to get the money.

Collateral is also a way of businesses being able to conduct transactions for which they do not have sufficient credit rating.