Simply said, collateral is something valuable that is given as a promise to get something else. For instance, a borrower might pledge the title to their car as collateral when asking for a loan. The car acts as a safety net or warranty in the event that the borrower breaches their terms. Collateralized loans often have interest rates that are significantly lower than unsecured loans. There are numerous conceivable collateral types. Among the most common types are mortgage collateral, invoice finance collateral, and margin trading collateral. Mortgage or real estate are without a doubt the most typical sorts of collateral used by borrowers. They deal with loans supported by real estate, such as a house, a building, or farmland. In this case, the property is the security utilized to protect the loan. Therefore, if the borrower doesn't make the payments as agreed upon in the contract, the lender has the right to take back possession of the borrower's real estate. Invoice finance, on the other hand, is a short-term borrowing strategy utilized by businesses. This kind of strategy involves companies using outstanding consumer invoices as security. They are therefore able to use cash upfront. Imagine, for example, that an online retailer sold $5000 worth of items, but that the business won't be able to use the money right away because the bulk of customers paid using credit cards. By employing the invoice financing method in this case, the company might improve cash flow by paying for high-priority needs in advance. When discussing margin trading, the term "collateral" refers to the assets that are kept in a margin trading account to protect any losses traders may experience while trading on leverage. In other words, when you borrow money to trade on margin, your account balance will act as collateral. The brokerage (or exchange) reserves the right to sell your assets if the market turns against you.