LoansFinancial Glossary
Collateral
Definition
An asset pledged by a borrower to a lender as security for a loan. If the borrower defaults, the lender can seize the collateral to recover the outstanding amount. In home loans, the property itself is collateral. In gold loans, the gold jewellery is collateral. Personal loans and credit cards are typically unsecured (no collateral).
Why It Matters
Collateral-backed (secured) loans always carry lower interest rates than unsecured loans because the lender's risk is reduced. A home loan at 8.5% versus a personal loan at 14% demonstrates this difference. Understanding collateral also explains why defaulting on a home loan means losing your property.