What term describes property that is pledged as security for a loan?

The term that describes property pledged as security for a loan is collateral. In the context of a mortgage or any secured loan, collateral refers to an asset that the borrower offers to the lender to secure the loan. If the borrower defaults on the loan, the lender has the right to seize the collateral to recover the outstanding debt. This practice reduces the risk for lenders, as they can rely on the collateral to reclaim their funds.

Understanding collateral is essential in real estate financing because it provides assurance to lenders about the creditworthiness of the borrower. In the case of a mortgage, the home or property itself often serves as the collateral. This reflects the importance of the relationship between the debt obligation and the property involved in securing that debt.

In contrast, an asset refers to anything of value that a person or entity owns, which can include cash, property, or investments. Equity represents the ownership interest in a property, calculated as the difference between the property's market value and the outstanding mortgage balance. A guarantee is a promise made by a third party to assume responsibility for the loan if the primary borrower defaults. While all these terms relate to financial agreements, collateral specifically denotes the property pledged to secure a loan.