How does loan collateral work? Let's say I need 1000$ but I have 10,000$ to offer as collateral. Why can't I just use the 10k and not take a 1k loan if I need 1k?
To have a better understanding of the collateral just think of some a real life examples:
1. You go to a pawn shop and borrow some money and the collateral can be a jewelry (that you don't want to sell).
2. You go to the bank and borrow some money and the collateral can be you house (that you don't want to sell it either).
Here, it's the same thing only that the accepted collateral it's ussually digital goods that the lender can sell to recoup his loss in case of default (most common are stable alt coins). In extreme rare cases are physical goods accepted.
I hope this clarify for you how loan collateral work.
Regards.