Collateral

Collateral is property you pledge when borrowing — an asset the lender can take if you fail to repay. A home, a car, a deposit or shares all qualify, as long as they carry a measurable value. It exists to reduce the lender's risk.

Pledging collateral lowers the rate noticeably, because the lender has less to fear. That is why a mortgage costs far less than an unsecured loan, and why the amount you can borrow scales with the value of what you pledge.

The trade is that failing to repay costs you the asset. A home pledged and then defaulted on goes to auction, and if it sells for less than the debt, the shortfall still belongs to you. Handing over collateral does not erase the loan.

Borrowing against shares carries a particular danger: the forced sale. If the pledged stock falls below a set level, the broker sells it without asking. The mechanism guarantees you are sold out at the worst possible price. Before pledging anything, ask whether losing that asset would still leave your life intact. That question matters most when the asset is the home you live in.