Collateral
Collateral is an item of value, such as a property, that a borrower puts forward as a means of securing a loan from a lender. The item can be seized by the lender if the borrower fails to repay the loan according to the terms which have been agreed. Therefore, collateral is a way in which a lender can acquire some security against the capital that they loan.
The lender’s claim to a borrower’s collateral is described as a 'lien'.
For the loan to be considered 'secure', the collateral’s value must equal or exceed the amount remaining on loan. Loans that are secured by collateral typically have lower interest rates than unsecured loans. This is because they are less risky for the lenders, as the borrower has a strong incentive to continue payment and losses can be recovered.
A mortgage is a common type of collateral. The mortgage lender (typically a bank) will usually require that the home being purchased is provided as collateral. If mortgage loan repayments are not made according to the agreed terms, the bank is entitled to take ownership of the home (described as foreclosure), which it can then sell as a means of recouping losses.
NB: In construction, the term 'collateral warranty' refers to an agreement associated with another 'primary' contract providing for a duty of care to be extended by one of the contracting parties to a third party who is not party to the original contract. See Collateral warranties for more information.
[edit] Related articles on Designing Buildings Wiki
- Backward integration.
- Bad debt.
- Collateral warranties.
- Construction loan.
- Credit check.
- Definition of collateral warranty.
- Equity in property.
- Funding options.
- Gazumping.
- Liens.
- Mezzanine finance.
- Performance bond.
- Practical considerations of collateral warranties.
- Property development finance.
- Remortgage.
- Trade credit insurance.
- What is a mortgage?
Featured articles and news
Shading for housing, a design guide
A look back at embedding a new culture of shading.
The Architectural Technology Awards
The AT Awards 2025 are open for entries!
ECA Blueprint for Electrification
The 'mosaic of interconnected challenges' and how to deliver the UK’s Transition to Clean Power.
Grenfell Tower Principal Contractor Award notice
Tower repair and maintenance contractor announced as demolition contractor.
Passivhaus social homes benefit from heat pump service
Sixteen new homes designed and built to achieve Passivhaus constructed in Dumfries & Galloway.
CABE Publishes Results of 2025 Building Control Survey
Concern over lack of understanding of how roles have changed since the introduction of the BSA 2022.
British Architectural Sculpture 1851-1951
A rich heritage of decorative and figurative sculpture. Book review.
A programme to tackle the lack of diversity.
Independent Building Control review panel
Five members of the newly established, Grenfell Tower Inquiry recommended, panel appointed.
Welsh Recharging Electrical Skills Charter progresses
ECA progressing on the ‘asks’ of the Recharging Electrical Skills Charter at the Senedd in Wales.
A brief history from 1890s to 2020s.
CIOB and CORBON combine forces
To elevate professional standards in Nigeria’s construction industry.
Amendment to the GB Energy Bill welcomed by ECA
Move prevents nationally-owned energy company from investing in solar panels produced by modern slavery.
Gregor Harvie argues that AI is state-sanctioned theft of IP.
Experimental AI housing target help for councils
Experimental AI could help councils meet housing targets by digitising records.
BSRIA Occupant Wellbeing survey BOW
Occupant satisfaction and wellbeing tool inc. physical environment, indoor facilities, functionality and accessibility.