Final answer:
Collateral is the asset a lender can collect if a borrower fails to repay a loan, often taking the form of valuable property or equipment.
Step-by-step explanation:
The asset that a lender can collect if a borrower fails to pay is called collateral. Collateral includes something valuable, often property or equipment, that a lender has the right to seize and sell to recover the funds from a loan if the borrower defaults on their repayment obligations. In the context of banking and loans, this is the bank's security to ensure that they can recover the amount lent in the event that the borrower is unable to fulfill the repayment schedule.
For example, when a bank provides a mortgage loan for a house, the house itself serves as collateral. If the borrower is unable to continue making payments, the bank can foreclose on the house, take possession of it, and eventually sell it to recoup the outstanding balance of the loan. This process protects the lender from the financial loss that would occur if the borrower stopped paying back the loan. Hence, collateral is a key component in lending as it provides a fallback for lenders to mitigate risk.