Standard loan agreements often specify collateral for the debt. Collateral is an asset that can be forfeited should the borrower defaults in paying the loan. Personal loan agreements generally don’t specify collateral. This is because personal loans are often unsecured; that is they are provided without collateral.

Because a personal loan contract is legally binding, a lender can take a borrower to court and have repayment ordered, including in the form of wage garnishment, a lien, or some other recourse. In many cases, personal loans are unsecured, meaning you don’t need to have some form of collateral to secure the loan.

Collateral on a loan backs up your promise to repay the lender with a physical asset. Even if you default on your loan or credit card, the lender can recoup the loss by seizing the asset. This type of loan is also known as a secured loan — the collateral “secures” financing.