Collateral is an asset pledged to a lender to reduce the lender's risk in the case of the borrower defaulting on the debt. If the borrower defaults, the lender can seize and sell the asset to satisfy the loan. Primary collateral is the first asset used to secure a loan.
Not All Loans Require Collateral
There are two kinds of debt: unsecured and secured.
Unsecured debt comes in the form of signature loans and credit cards and doesn't require collateral. This debt is unsecured because there's no safety net for the lender; in the case of default, the lender has nothing in exchange for the loan. Unsecured loans are made on the creditworthiness of the borrower.
Secured debt is backed by an asset the borrower will lose in the case of default. Common forms of secured loans are car loans and mortgages. If the borrower stops making payments on a car loan, the creditor can take the car. If the borrower stops making mortgage payments, the bank can foreclose on the house.
Primary Collateral Is a Pledged Asset
Primary collateral is the main, or first, asset pledged to secure a loan. Sometimes a loan has secondary collateral -- for instance, when one mortgage covers multiple pieces of real estate, as in a blanket mortgage.
Collateral pledged isn't necessarily equal in value to a loan. In the case of a car loan where the car is the collateral for the secured debt, for example, the loan is paid down over time and the value of the car goes down. The car is no longer collateral when the loan is paid in full.