Collateral vs. Security — What's the Difference?
By Urooj Arif & Maham Liaqat — Updated on March 21, 2024
Collateral refers to assets pledged by a borrower to secure a loan, while security generally denotes any financial asset used as a guarantee for loan repayment.
Difference Between Collateral and Security
Table of Contents
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Key Differences
Collateral is specifically the assets a borrower offers to a lender as a way to secure a loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral. Whereas, security encompasses a broader range of financial assets, including stocks, bonds, and collateral, used to guarantee the repayment of a loan. Security serves as a general term that can refer to any asset, including collateral, used in securing a loan or guaranteeing repayment.
In the context of lending, collateral often includes tangible assets like real estate, vehicles, or equipment. These assets have a physical presence and can be appraised for a specific value. On the other hand, security can include both tangible and intangible assets. For example, securities can be stocks, bonds, or even financial instruments like derivatives, which are not physical assets but have value in financial markets.
The role of collateral is to reduce the risk for the lender by providing a way to recoup losses if the borrower defaults on the loan. This makes loans with collateral less risky and potentially lowers the interest rate for the borrower. In contrast, the term security is more about ensuring that there is an asset or group of assets that can be used or liquidated to repay a debt, which might not necessarily lower the interest rate but provides a form of guarantee to the lender.
Lenders assess the value of collateral through appraisal processes, considering depreciation and potential market value changes. Security valuation, especially for financial instruments like stocks or bonds, is more dynamic and can fluctuate based on market conditions. This difference in valuation methods reflects the varying nature and use of collateral versus securities.
While collateral directly impacts the terms and conditions of a specific loan agreement, securities play a broader role in the financial system. Securities are not only used for loan agreements but also for investment purposes, reflecting their versatility beyond just serving as a loan guarantee.
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Comparison Chart
Definition
Assets pledged to secure a loan.
Financial assets used as a guarantee for repayment.
Nature
Often tangible assets.
Can be tangible or intangible assets.
Purpose
To reduce the lender's risk by providing a way to recoup losses.
To serve as a guarantee for loan repayment or financial obligations.
Valuation
Through appraisal of physical value.
Fluctuates with market conditions.
Use in Financial System
Specifically for securing loans.
Broadly used in investments and as loan guarantees.
Compare with Definitions
Collateral
Property pledged by a borrower.
The bank required additional collateral due to the loan's size.
Security
Ensures loan obligations.
The contract specified which securities were backing the loan.
Collateral
Assets offered to secure a loan.
He used his house as collateral for the business loan.
Security
Can be tangible or intangible.
Intellectual property rights can sometimes be used as security.
Collateral
Reduces lender risk.
Offering land as collateral made the loan terms more favorable.
Security
Includes stocks, bonds, derivatives.
He offered his stock portfolio as security for a loan.
Collateral
Tangible asset guarantee.
They accepted jewelry as collateral for the personal loan.
Security
Financial asset for repayment guarantee.
Government bonds can act as security in large transactions.
Collateral
Security against loan default.
Vehicles can serve as collateral in auto loans.
Security
Broad use in finance.
Securities are traded on the stock market.
Collateral
Something pledged as security for repayment of a loan, to be forfeited in the event of a default
She put her house up as collateral for the bank loan
Security
Security is freedom from, or resilience against, potential harm (or other unwanted coercive change) caused by others. Beneficiaries (technically referents) of security may be of persons and social groups, objects and institutions, ecosystems or any other entity or phenomenon vulnerable to unwanted change.
Collateral
A person having the same ancestor as another but through a different line.
Security
Freedom from risk or danger; safety.
Collateral
Additional but subordinate; secondary
The collateral meanings of a word
Security
Freedom from doubt, anxiety, or fear; confidence.
Collateral
Descended from the same stock but by a different line
A collateral descendant of Robert Burns
Security
A group or department of private guards
Call building security if a visitor acts suspicious.
Collateral
Situated side by side; parallel
Collateral veins
Security
Measures adopted by a government to prevent espionage, sabotage, or attack.
Collateral
Situated or running side by side; parallel.
Security
Measures adopted, as by a business or homeowner, to prevent a crime such as burglary or assault
Security was lax at the firm's smaller plant.
Collateral
Coinciding in tendency or effect; concomitant or accompanying.
Security
Measures adopted to prevent escape
Security in the prison is very tight.
Collateral
Serving to support or corroborate
Collateral evidence.
Security
Something deposited or given as assurance of the fulfillment of an obligation; collateral.
Collateral
Of a secondary nature; subordinate
Collateral target damage from a bombing run.
Security
One who undertakes to fulfill the obligation of another; a surety.
Collateral
Of, relating to, or guaranteed by a security pledged against the performance of an obligation
A collateral loan.
Security
A financial instrument, such as a stock or bond, representing rights of ownership or creditorship and often traded in secondary markets.
Collateral
Having an ancestor in common but descended from a different line.
Security
(uncountable) The condition of not being threatened, especially physically, psychologically, emotionally, or financially.
Chad always carries a gun for his own security.
The pink blanket gives little Mary lots of security.
Collateral
Property acceptable as security for a loan or other obligation.
Security
(countable) Something that secures.
Collateral
A collateral relative.
Security
An organization or department responsible for providing security by enforcing laws, rules, and regulations as well as maintaining order.
Pamela works in security.
Collateral
Parallel, along the same vein, side by side.
Security
(legal) Something that secures the fulfillment of an obligation or law.
Collateral
Corresponding; accompanying, concomitant.
Security
(legal) Freedom from apprehension.
Collateral
Being aside from the main subject, target, or goal.
Although not a direct cause, the border skirmish was certainly a collateral incitement for the war.
Collateral damage
Security
A tradeable financial asset, such as a share of stock.W
Collateral
(genealogy) Of an indirect ancestral relationship, as opposed to lineal descendency.
Uncles, aunts, cousins, nephews and nieces are collateral relatives.
Security
(finance) Proof of ownership of stocks, bonds or other investment instruments.
Collateral
(finance) Relating to a collateral in the sense of an obligation or security.
Security
(finance) Property etc. temporarily relinquished to guarantee repayment of a loan.
Collateral
(finance) Expensive to the extent of being paid through a loan.
Security
A guarantee.
Collateral
Coming or directed along the side.
Collateral pressure
Security
(obsolete) Carelessness; negligence.
Collateral
Acting in an indirect way.
Security
The condition or quality of being secure; secureness.
His trembling hand had lost the ease,Which marks security to please.
Collateral
Having the phloem and xylem adjacent.
Security
Hence, carelessness; negligence; heedlessness.
He means, my lord, that we are too remiss,Whilst Bolingbroke, through our security,Grows strong and great in substance and in power.
Collateral
(finance) A security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay.
Security
That which secures or makes safe; protection; guard; defense.
Those who lent him money lent it on no security but his bare word.
Collateral
A collateral (not linear) family member.
Security
Freedom from risk; safety.
Give up yourself merely to chance and hazard,From firm security.
Some . . . alleged that we should have no security for our trade.
Collateral
(marketing) Printed materials or content of electronic media used to enhance sales of products (short form of collateral material).
Security
One who becomes surety for another, or engages himself for the performance of another's obligation.
Collateral
(archaic) A contemporary or rival.
Security
An evidence of debt or of property, as a bond, a certificate of stock, etc.; as, government securities.
Collateral
Coming from, being on, or directed toward, the side; as, collateral pressure.
Security
The state of being free from danger or injury;
We support the armed services in the name of national security
Collateral
Acting in an indirect way.
If by direct or by collateral handThey find us touched, we will our kingdom give . . . To you in satisfaction.
Security
A formal declaration that documents a fact of relevance to finance and investment; the holder has a right to receive interest or dividends;
He held several valuable securities
Collateral
Related to, but not strictly a part of, the main thing or matter under consideration; hence, subordinate; not chief or principal; as, collateral interest; collateral issues.
That he [Attebury] was altogether in the wrong on the main question, and on all the collateral questions springing out of it, . . . is true.
Security
A department responsible for the security of the institution's property and workers;
The head of security was a former policeman
Collateral
Tending toward the same conclusion or result as something else; additional; as, collateral evidence.
Yet the attempt may giveCollateral interest to this homely tale.
Security
Measures taken as a precaution against theft or espionage or sabotage etc.;
Military security has been stepped up since the recent uprising
Collateral
Descending from the same stock or ancestor, but not in the same line or branch or one from the other; - opposed to lineal.
Security
Defense against financial failure; financial independence;
His pension gave him security in his old age
Insurance provided protection against loss of wages due to illness
Collateral
A collateral relative.
Security
Freedom from anxiety or fear;
The watch dog gave her a feeling of security
Collateral
Collateral security; that which is pledged or deposited as collateral security.
Security
An electrical device that sets off an alarm when someone tries to break in
Collateral
A security pledged for the repayment of a loan
Security
Property that your creditor can claim in case you default on your obligation;
Bankers are reluctant to lend without good security
Collateral
Descended from a common ancestor but through different lines;
Cousins are collateral relatives
An indirect descendant of the Stuarts
Security
A guarantee that an obligation will be met
Collateral
Serving to support or corroborate;
Collateral evidence
Collateral
Accompaniment to something else;
Collateral target damage from a bombing run
Collateral
Situated or running side by side;
Collateral ridges of mountains
Common Curiosities
What is the main difference between collateral and security?
Collateral specifically refers to assets pledged to secure a loan, whereas security can include any financial asset used as a guarantee for repayment.
Are all securities considered collateral?
Not all securities are used as collateral; some serve primarily as investment vehicles or for other financial obligations.
Can securities act as collateral?
Yes, securities like stocks or bonds can act as collateral for loans.
Is real estate considered collateral or security?
Real estate can be considered both, depending on its use: as collateral when it secures a specific loan, and as security in a broader financial context.
What happens to collateral if a borrower defaults on a loan?
The lender may seize the collateral to recoup the loan amount.
Can intangible assets serve as security?
Yes, intangible assets like intellectual property or financial instruments can serve as security.
How do lenders evaluate collateral?
Lenders appraise collateral based on its current market value and potential depreciation.
Why might a lender prefer collateral over other forms of security?
Collateral offers a tangible way to recover funds if a borrower defaults, potentially reducing the lender’s risk and the loan's interest rate.
How is the value of securities determined?
The value of securities is determined by market conditions, including supply and demand dynamics, economic indicators, and the issuer's financial health.
Can the value of security change over time?
Yes, especially for securities like stocks or bonds, their value can fluctuate based on market conditions.
How does the presence of collateral affect a loan agreement?
Collateral can lead to more favorable loan terms, such as lower interest rates, due to reduced risk for the lender.
What role do securities play in the financial market?
Securities facilitate investment, trading, and risk management, serving as key instruments in the financial market.
What types of assets are commonly used as collateral?
Common collateral assets include real estate, vehicles, and jewelry.
Do all loans require collateral?
No, some loans, particularly unsecured loans, do not require collateral but may have higher interest rates.
How does collateral benefit borrowers?
Collateral can enable borrowers to access loans they might not otherwise qualify for and at better rates.
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Written by
Urooj ArifUrooj is a skilled content writer at Ask Difference, known for her exceptional ability to simplify complex topics into engaging and informative content. With a passion for research and a flair for clear, concise writing, she consistently delivers articles that resonate with our diverse audience.
Co-written by
Maham Liaqat
