Collateral is defined as any specific property or asset offered to a creditor to ensure the effective settlement of a debt. The collateral helps to ensure that the creditor can avoid any major losses that may result from the default or insolvency of the debtor. Therefore if the borrower does not fulfil the payment obligations under the loan, the lender is entitled to seize the collateral to recoup the loss. The collateral does not become property of the creditor, because creditor’s right is limited to the part of the debt still pending payment. This means that if the property or asset was worth £50,000 but the outstanding debt (including any fees) was only £30,000 then £20,000 would be returned to the debtor.
In complementary currency practice, collateral is used in some systems, to minimize the default risk of the credits issued. Most prominently, credit in the Swiss WIR currency is often issued against a second morgage on real estate.