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.