collateral (kəlătˈərəl) [key], something of value given or pledged as security for payment of a loan. Collateral consists usually of financial instruments, such as stocks, bonds, and negotiable paper, rather than physical goods, although the latter may also be accepted as such. In case of default, the creditor may sell the collateral and apply the money thus acquired to payment of the debt, charging the debtor with any deficiency or crediting him with any surplus. The borrower may usually substitute other collateral for that held by the lender if it is acceptable to the latter. Such a privilege is particularly useful to borrowers who buy and sell securities. Merchandise collateral—such as negotiable warehouse receipts, bills of lading, and trust receipts—is also used, as is personal collateral, including deeds, mortgages, leases, and other rights in real estate. Other collateral may include bills of sale of movable goods, such as crops, machinery, furniture, and livestock, and savings-bank passbooks.
The Columbia Electronic Encyclopedia, 6th ed. Copyright © 2012, Columbia University Press. All rights reserved.