Collateral
Also called Security
An asset you pledge to a lender as security, which it can take if you don't repay.
Collateral is what you put up as security when you borrow. Your FD backs a loan against FD, the car backs a car loan, gold backs a gold loan. Because the lender can fall back on it, a secured loan usually costs less, but if you don’t repay, you can lose the asset.
Questions people ask
What is collateral in a loan?
Collateral is something valuable you pledge to the lender, like property, gold, a fixed deposit or the car you're buying. If you don't repay, the lender can recover its money from it.
Why are secured loans cheaper?
Because the lender has an asset to fall back on, its risk is lower, so the interest rate is usually lower than on an unsecured loan like a personal loan or credit card.
Do education loans need collateral?
Not always. RBI made it mandatory in 2010 that banks do not take collateral on education loans up to 4 lakh rupees, and a government guarantee scheme covers loans up to 7.5 lakh rupees without collateral. Check the current limits with your bank.
One money lesson, in your inbox
A short, plain money lesson built from real news. Free. Unsubscribe anytime.
We will never spam you or sell your details. How we handle your email