Collateral is an item of value that is accepted by the lender to be used to pay back the loan if you are unable to repay it yourself.

A home mortgage is a good example of collateral.  When most people buy a house, they do not have enough money to pay for the house.  So, a bank lends them the money to pay for the house.  The people then make monthly payments to the bank until they pay back the money they owe.  If the people were to stop making their monthly payments, the bank would take the house.