What does collateral mean?

Something of value that is pledged to pay off a loan or debt if payments aren't made according to the agreement. Also called security.

Mortgages and car loans are known as "secured" loans given that the underlying assets they are used to purchase (i.e. a house or a car) serve as collateral for the original loan. In other words, if a borrower does not make payments as originally agreed, the lender may be able to sell the aforementioned assets in order to recoup amounts owed.

While the ability to put collateral down on a loan may help you garner a lower interest rate given that it mitigates a certain amount of a lender's risk, it does make the prospect of experiencing payment difficulties perhaps more serious since they could result in you losing your means of transportation or even your home. That is why unsecured debt such as that which originates from a credit card is often considered preferable and why it makes sense to transfer what remains of a secured loan's balance to a credit card, if any issuers will allow you to do so. Even if you do default on what you owe, you won't necessarily lose any tangible assets.

It's also important to note that collateral is property that is subject to a lien. In other words, if you fail to pay taxes, child support, or certain other obligations, the government may require that these obligations are satisfied before you sell the property or via proceeds from the sale.