Collateral is something that is used to secure a loan. You put collateral up when securing a loan so if you cannot afford to pay back the lender, they can sell the equipment and get their money back. Collateral makes it possible to get large loans. When you pledge collateral, the lender takes less risk and can offer you a better rate.
Collateral will be required when the lender wants some assurance that they will not lose all their money. If you pledge an asset as collateral, your lender has the right to take action (if you stop making loan payments) and take possession of the collateral you put up to secure the loan. They will then sell the collateral and use the sales proceeds to pay off the loan. Lenders would prefer to get their money back and would rather not have to bring legal action against you, so they try to use collateral as a safeguard.