Question

Homer wants to borrow money from the Springfield Bank to buy a new trampoline. The bank requires collateral for a loan. What is collateral?

Answer 1

Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. A lender's claim to a borrower's collateral is called a lien.

Answer 2

Normally, unless it is a sort of pawnshop or personal type of loan, you the borrower hold the collateral. For example, if you get a loan on a vehicle, you have possession of the vehicle as long as you are making payments as agreed. If you stop making the payments, the one to whom you owe the money (the lien holder) can take possession of the vehicle, sell it, and you would be responsible to pay the difference between what it is sold for and the amount you still owe, if there is a difference