Collateral

What does it mean?

Collateral is an asset that you can pledge as security for a loan. If you fail to repay the loan, the lender has the right to sell the collateral to claim the dues. You can get a home loan, a gold loan, a business loan, a loan against FD and a personal loan with collateral, among other types of loans. 

Common examples of collateral include:

• Real estate
• Gold
• Fixed deposits
• Inventory
• Accounts receivables
• Machinery and equipment

Points to remember:

• After you clear your loan against collateral, the lender returns the asset to you
• The value of collateral can change over time and affect their suitability

FAQs on Collateral

Can you put collateral on a personal loan?

Yes, some lenders offer personal loans with collateral, which are also called secured personal loans. You need to provide collateral as security to avail of these loans. Collateral for a personal loan includes a car, home, jewellery or stocks, among other assets.

Who is eligible for a loan against collateral?

To get a loan against collateral, you must be an Indian resident and at least 18 years old. You must provide an asset whose value is more than the loan amount. The other eligibility terms depend on the lender you choose.

Is a personal loan collateral-free?

Yes, personal loans are typically unsecured, meaning you do not need to provide collateral as security to get the funds. However, some lenders offer secured personal loans, where you must pledge your asset as collateral to get the funds. Providing collateral comes with various benefits, including lower interest rates, higher loan amounts and better terms.

What is the danger of putting up collateral for a loan?

The biggest danger of pledging your valuable assets as collateral is the potential loss of your asset if you default on your loan. If you fail to pay the dues, the lender has the right to sell your asset and claim the loan amount. Defaulting on a secured loan also negatively impacts your credit scores, similar to other types of loans. 

What percentage of a loan is collateral?

Typically, the borrowing base, which is the maximum loan amount you can get, is 70%-90% of the value of the collateral.

What is a collateral fee?

A collateral fee or a cash collateral fee is the amount that a lender pays to a borrower for loans backed by cash collateral.