What is Collateral?

Borrowing money is a big step, and understanding what collateral is and how it works can help you save money and get better loan deals.

Let’s break down what collateral is, why it matters, and how it can save you money when used wisely.

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What is a Collateral? 

Collateral is something valuable like property, fixed deposits, or even gold that you pledge to a lender while taking a loan. If you repay on time, the asset stays yours. If not, the lender can use that asset to recover the money.

Examples of Collateral: House, land, fixed deposit, insurance policy, gold

So collateral is a safety net for the bank and a trust badge for you as a borrower.

In an education loan, pledging your property as a collateral can get you lower interest rates and higher loan amounts.

Let’s Explain Collateral to a 7 Year Old

Imagine you want to borrow your friend’s toy for a week.
Your friend says: “What if you don’t return it?”
So, you give your video game as a promise.

• If you return the toy, you get your game back.
  
• If you don’t, your friend keeps the game.
  

That video game is your collateral. Adults do the same thing with banks!

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Types of Collateral

Collateral can vary depending on the type of loan:

• Home Loans: Your house becomes the collateral.
• Car Loans: The vehicle itself serves as security.
• Education Loans: You might pledge fixed deposits, property, or even insurance policies.
  

Collateral doesn’t always mean losing control of the asset. You still live in your house or use your car, but, in adverse cases, if you fail to repay the loan, the lender has legal rights to take over.

Are there Any Benefits of Collateral Loan? 

Collateral (Secured) Education Loans are loans backed by an asset like property, fixed deposit, or other security. Thus, they are often preferred for higher amounts. Since they come with a safety net for the lender, they come with several benefits:

Lower Interest Rates: Lenders charge less due to reduced risk.

Higher Loan Amounts: Easier approval for large sums.

Longer Repayment Tenure – Flexible EMIs over an extended period.

Higher Approval Chances – Collateral increases eligibility and lender confidence.

Faster Processing for Big Loans – Security speeds up approval for high-value loans.

How Collateral Can Save You Lakhs- A Practical Example

Meet Priya, a student in Mumbai, who wants to pursue a master’s degree in the UK. The total cost comes to ₹25,00,000. She approaches two banks:

Option 1: Loan Without Collateral

Loan Amount: ₹25,00,000

Interest Rate: 13% per annum

Repayment Period: 7 years

Monthly EMI: ₹47,293

Total Repayment: ₹39,72,612

Total Interest Paid: ₹14,72,612

Option 2: Loan With Collateral (her parents’ apartment pledged)

Loan Amount: ₹25,00,000

Interest Rate: 9% per annum

Repayment Period: 7 years

Monthly EMI: ₹40,568

Total Repayment: ₹34,88,992

Total Interest Paid: ₹9,88,992

What Changed?

By pledging collateral, Priya secured a lower interest rate and saved almost ₹4.8 lakh in interest over the loan period. That’s nearly the cost of her first few months of living expenses abroad. For her, the decision changed because her family agreed to pledge the asset to make her education more affordable.

Pro Tip: Even if you can take an unsecured loan, offering collateral can save you lakhs in interest over the loan tenure.

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Making a Decision: What Should You Consider?

Before deciding whether to go for a loan with or without collateral, ask yourself:

• Do you or your family have assets to pledge?
  
• Are you comfortable with the lender holding rights over that asset until repayment?
  
• Are you aware that if the loan isn’t repaid, the lender can take ownership of the pledged asset to recover the dues?
  
• How much interest can you save in the long term?
  
• What happens in case you miss payments?
  

Collateral can be a powerful tool to get lower interest rates, but it also comes with responsibility. You must be planned and confident about repaying on time. 

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The Takeaway

Choosing between a collateral or non-collateral loan isn’t just about numbers, it’s about strategy. Collateral can turn a high-cost loan into a budget-friendly one, saving you lakhs in interest. Non-collateral loans, meanwhile, give you freedom without risking your assets.

In the end, the best loan is the one that aligns with your long-term comfort, whether that’s saving money with collateral or sleeping peacefully knowing your assets are safe.

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