Final answer:
Collateral refers to something valuable that a lender can seize if a borrower fails to repay a loan, while a lien is a legal claim or right a creditor has over an asset until a debt is fully paid off.
Step-by-step explanation:
Collateral refers to something valuable, often property or equipment, that a lender can seize and sell if the borrower fails to repay the loan. It serves as a form of security for the lender to mitigate the risk.
Lien, on the other hand, is a legal claim or right that a creditor has over an asset owned by the debtor until a debt is fully paid off. It allows the creditor to sell the asset to recover their funds in case of default.
For example, if a person takes out a loan to purchase a car, the car itself can act as collateral. If the person fails to make loan payments, the lender can repossess and sell the car to recoup their losses. In this case, the car acts as collateral. On the other hand, a lien can be placed on a property by the local government for unpaid property taxes or by a contractor for unpaid services. The lien ensures that the debt is repaid by giving the creditor the right to sell the property to recover the debt.