In financing terms, what is a 'collateral'?

Collateral refers to an asset that a borrower offers to a lender to secure a loan. This asset acts as a guarantee that the lender can claim in case the borrower defaults on their repayment obligations. In the event of default, the lender can seize the collateral and sell it to recover the outstanding loan amount. This arrangement reduces the risk for the lender and can also enable borrowers to obtain loans they might not otherwise qualify for without providing such security.

The other options do not accurately describe collateral. For instance, a document stating debt repayment refers to a promissory note or agreement but does not involve an asset itself. An agreed interest payment pertains to the cost of borrowing and does not represent security for the loan. Similarly, a legal claim on the property can refer to a lien, which may arise from a default, but does not pinpoint the concept of collateral specifically. Thus, the definition of collateral as an asset securing a loan is the most accurate representation in this context.