Collateral is an asset you pledge to guarantee a loan. It gives the lender a safety net — if you stop paying, they can seize and sell the collateral to recover their money. Common collateral: real estate (for mortgages), vehicles (for car loans), equipment (for business loans), and gold (for gold loans).
Collateral dramatically affects your loan terms and interest rate. A secured loan (with collateral) might carry 8-10% interest, while an unsecured personal loan (no collateral) might cost 14-20%. The bank's risk is lower when they can recover assets, so they charge less.
In India, the SARFAESI Act allows banks to seize collateral without going to court if a loan becomes NPA. Gold loans are hugely popular — India's gold loan market exceeds Rs 7 lakh crore. Banks typically lend 60-80% of the collateral's value (called the loan-to-value ratio).