Collateral is a term used to describe an asset that a lender accepts as security for a loan. Depending on the purpose of the loan, collateral might be real estate or other types of assets. For the lender, the collateral serves as a sort of insurance. If the borrower defaults on their loan payments, the lender can seize and sell the collateral to recuperate part or all of their losses.
Collateral is an item that is effectively held hostage by the creditor (person lending money) as guarantee that the debtor (the person who borrowed money) will repay the loan.
If I am loaning you $300 for a week until your pay-check comes in, I might ask to hold something I know you value as collateral. If I am not a friend of yours, and this is a business transaction, the item I ask for should be sellable for about the amount of money I lent you (or more).
For larger loans, often the thing you are buying serves as collateral for the loan – if you cannot keep making your payments, the bank gets to take the car/house/whatever that you originally took out the loan to help you buy.