Collaterization Law and Legal Definition

Collateralization is the act where a borrower pledges an asset as recourse to the lender in the event that the borrower defaults on the initial loan. It serves as a protection for a lender against a borrower's default. If a borrower defaults on a loan, the borrower forfeits the property pledged as collateral. Mortgage financing allows borrowers to hold title over their own home despite acquiring it through borrowed funds. If the borrowers default on the mortgage payments, the lender has a right to sell the property to recover the loan amount.