Word of the day | Collateral

Collateral

In simple terms, collateral is like a security blanket for the lender.

  • Imagine you're borrowing money.

  • Collateral is something valuable you own that you "pledge" to the lender. This could be your car, your house, or even valuable jewelry.

Here's the deal:

  • If you can't pay back the loan, the lender can take your collateral and sell it to get their money back.

Think of it like this:

  • You're borrowing money to buy a car.

  • The car itself becomes the collateral.

  • If you stop making payments, the bank can repossess the car and sell it to recover the loan amount.

Collateral makes the lender feel more comfortable lending you money because they know they have something valuable to fall back on if you can't repay the loan.

Head to https://www.dbm.academy/faq for more blockchain vocabulary