It's what you promise to give someone if you don't repay a loan, like the car you put up as collateral when you take a loan out from the bank. As an adjective, collateral can refer to something indirect or off to the side, like collateral damage.
Collateral is the watch you put on the table in a poker game, or the shoes you trade in at the bowling alley. If you pay back your debts, you get your goods back. As an adjective, collateral describes something indirect, like collateral damage (non-soldiers inadvertently killed in war) or collateral relatives such as your second-cousin-once-removed that your mother keeps bugging you to call.