What is collateral?

Collateral is any property or asset pledged by a debtor to secure repayment of a debt. It can take many forms, but generally involves some sort of property already owned by (or expected to be acquired by) the debtor. For example, in a mortgage agreement the collateral is the house itself. Under a security agreement, the debtor's personal property (non-real estate) and intangibles, such as intellectual property, are often used as collateral.

Accurate classification of collateral is critical for security agreements. Often, classification depends on how exactly the debtor uses a particular asset. For example, a titled vehicle primarily used for personal or family purposes may be classified as consumer goods. However, if the vehicle is held for sale, it may be deemed inventory. If the vehicle is regularly used for business purposes, it should be classified as equipment. 

Other examples of collateral include inventory, equipment, machinery, farm products and crops, appliances, furnishings, fixtures, accounts receivable, deposit accounts, contract rights, and general intangibles. If the debtor defaults on repayment, the creditor (also called the secured party) will be able to keep or sell the collateral. 

Was this helpful? /

Can't find what you are looking for?

Contact us here.