In finance, the term collateral denotes assets pledged by a borrower to a lender which the lender can claim if the borrower defaults on loan repayment.
When a homeowner mortgages their home, for example, they are pledging their home as collateral against a loan. If they fail to repay the loan as promised, the lender can claim the home as collateral as per the loan agreement.
The same holds true for secured loans, where a personal loan or business loan is secured by collateral such as real estate or liquid assets.
Collateral may also be used to secure more complex debt instruments like collateralized mortgage obligations and collateralized debt obligations.
Lombard loans are a form of personal loan which are secured by collateral such as securities or precious metals and can be freely drawn upon up to the value of the collateral. Lombard loans are offered by many Swiss banks.
Policy loans are secured by the cash value of a permanent life insurance policy, which acts as collateral against the loan. Most Swiss permanent life insurance policies can be used as collateral against policy loans from insurance providers or banks.
