Collateral

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When you borrow money, collateral is something of value you own that the lender can take possession of in case you default on the loan. For example, you might borrow $50 from your sister, and to make sure you pay her back she may say, "Give me your camera, and when you pay me back the $50, I'll return the camera." The camera is collateral for the $50 loan. A common use of collateral is when you use a pawnbroker - and actually your sister is acting a little like a pawnbroker. Collateral is used in business lending, too, in which a company might offer some machinery or a building as collateral in order to get a loan from a bank. See also Secured Loan.