Collateral
An asset pledged by the borrower as security against the loan.
Apply for a LoanWhat is Collateral?
Collateral is an asset owned by the borrower that is pledged to the lender as security for the loan. If the borrower fails to repay, the lender has the legal right to seize and sell the collateral to recover the outstanding amount. Loans with collateral are called secured loans (lower interest rates). Loans without collateral are unsecured (higher rates, lower amounts). Common collateral in India includes immovable property (land, buildings), fixed deposits, gold, and machinery.
Example
Home construction loan: the plot of land and the building under construction are mortgaged as collateral. If you default, the lender can auction the property. Equipment finance: the JCB or excavator purchased is hypothecated. Personal loan: no collateral required — hence higher rate (14–24% vs 8.5–10% for secured loans).
Frequently Asked Questions
Can I get a loan without collateral in India?
Yes — personal loans, business loans (under CGTMSE scheme), and MUDRA loans are unsecured (no collateral). Working capital loans can be unsecured up to ₹10 Lakh. However, unsecured loans have higher interest rates (14–24% vs 8.5–12% for secured) and lower maximum amounts. For collateral-free business loans up to ₹2 Crore, CGTMSE provides a government guarantee to the lender.
What happens to collateral if I default on a loan?
If you default on a secured loan (EMI unpaid for 90+ days), the lender follows SARFAESI Act 2002 (for loans above ₹1 Lakh): they issue a notice, give 60 days to respond, then take possession of the collateral and sell it through an authorised auction. Proceeds first cover the outstanding loan, then lender's expenses; any surplus is returned to you. For residential property, lenders must give prior notice and opportunity to cure the default.
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