Collateral refers to the assets (items of high value) that a borrower cedes to the lender in order to raise finance. For example, if you apply for a loan to buy a house, the house then becomes the collateral. This means that whilst it is registered in your name, it is ceded to the lender for the duration of the mortgage loan. If you stop making your monthly mortgage payments, the lender has the legal right to sell the house to recover the full amount of money owing (the original capital amount together with all accumulated interest charges).