What does Collateral Security mean?

It is a given fact that when contracting a mortgage, or any kind of loan, the borrower must provide some kind of collateral which will serve as a security for the lender in case the borrower defaults on his payments towards this loan.

Basically stocks, bonds and different documents which certify an ownership are put at the disposal of the lender as a guarantee that the loan is going to be repaid in its entirety. In case the borrower for one reason or the other defaults on these payments, the lender has the right to exchange/sell these certificates in order to cover for his loss. In the business world for example, documents such as warehouse receipts are used as collateral security options for the loan.

These warehouse receipts which actually stand for goods which are stocked in commercial quantities in different warehouses, are put at the disposal of the lending institution (a bank in most of the cases), and if the borrowing party defaults with his payments, the bank takes over proprietorship of the abovementioned goods, which are subject to selling so that the bank recovers its debt.