Collateral is something valuable that you promise to give to a lender if you can't repay a loan. It reduces the lender's risk because they can sell the collateral to recover their money if you default. Common collateral includes homes, cars, or investment accounts.
You apply for a $50,000 car loan. The car itself serves as collateral. If you stop making payments, the lender can take the car back and sell it to recover their money. Because the lender has this protection, they may offer you a lower interest rate than an unsecured personal loan.
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