Collateral is an item that can be repossessed if the borrower fails to make payments. In an automotive loan, for example, the car is the collateral item. Sometimes it's what the borrower took the loan out for, and sometimes it's an item they already own, and are offering as collateral to get access to a loan. You might also hear people talk about the loan being "collateralized" or "secured" by that item.

For info on how collateral works in LMS, see Collateral Overview.