collaterals

Collaterals, in finance, are assets pledged by a borrower to secure a debt or performance obligation. The lender holds a security interest in the collateral, which reduces credit risk and can influence loan terms, such as interest rate and loan-to-value ratio.

Collateral can be tangible or intangible. Tangible assets include real estate, equipment, inventory, and vehicles. Intangible assets include accounts receivable, patents and trademarks, licenses, and contractual rights. Financial instruments such as stocks or bonds can also serve as collateral. In some cases, future payments may be pledged.

Creation and management: A security agreement or pledge creates the lender’s lien; perfection through filing or registration establishes priority. Lenders may value collateral, require insurance, and monitor its condition. For receivables, some agreements provide control or assignment mechanisms to ensure enforceability.

Enforcement: On default, lenders may seize or foreclose on collateral, sell it, and apply proceeds to the debt. If proceeds do not cover the obligation, a deficiency may remain. Legal frameworks determine the order of claims and affected parties' rights.

Risks and governance: Borrowers risk loss of pledged assets; lenders face value declines, improper perfection, or encumbrances that threaten recovery. Jurisdictional differences matter; many markets rely on security interests, with systems such as the UCC in the United States and similar regimes elsewhere.