<Tr> <Td> </Td> <Td> This article needs additional citations for verification . Please help improve this article by adding citations to reliable sources . Unsourced material may be challenged and removed . (November 2016) (Learn how and when to remove this template message) </Td> </Tr> <P> In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan . The collateral serves as a lender's protection against a borrower's default and so can be used to offset the loan if the borrower fails to pay the principal and interest satisfactorily under the terms of the lending agreement . </P> <P> The protection that collateral provides generally allows lenders to offer a lower interest rate on loans that have collateral compared to those without collateral because the risk of loss to the lender is lower . The reduction in interest rate can be up to several percentage points, depending on the type and value of the collateral . For example, the interest rate (APR) on an unsecured loan is often much higher than on a secured loan or logbook loan, as the risk for the lender is then increased . </P> <P> If a borrower defaults on a loan (due to insolvency or another event), that borrower loses the property pledged as collateral, with the lender then becoming the owner of the property . In a typical mortgage loan transaction, for instance, the real estate being acquired with the help of the loan serves as collateral . If the buyer fails to repay the loan according to the mortgage agreement, the lender can use the legal process of foreclosure to obtain ownership of the real estate . A pawnbroker is a common example of a business that may accept a wide range of items as collateral . </P>

A loan for which a specific asset is used as collateral or pledged