What is Collateralization?

In many credit agreements, a borrower is required to pledge some assets as collateral for the loan. These assets are known as “collateral”. These assets can be seized by the lender when such borrower defaults on the repayment of the loan.

Collateralization is a situation whereby a borrower offers a specific property or assets to a lender to secure the loan in the event of the borrowers default on the loan. Collateralization gives lenders the confidence to issue a loan to the borrower, and an assurance that the loan will be repaid.