Do all personal loans need collateral? Here's what borrowers must know

In India, personal loans are one of the easiest ways to avail funds for urgent financial needs and aspirations. Be it a medical emergency, home renovation or a wedding all such life events require money for efficient management, that is why the importance of personal loans for borrowers cannot be underestimated.

In such a scenario a common doubt among borrowers is whether every personal loan requires a collateral or not. The simple answer to the same is that not every personal loan requires the borrower to submit a collateral.

Furthermore, whether collateral is needed depends on the loan type whether the loan is a secured loan or an unsecured loan and the lender's risk taking appetite.

Secured vs unsecured personal loans

All personal loans are generally provided in two forms: unsecured and secured. It is important to understand the key differences between the two before applying as the requirement of a collateral entirely depends on the type of loan an applicant is looking to apply:

This table is for illustrative purposes only. For specific loan offers, eligibility, and terms, please visit the official websites of the respective banks.

When is collateral required?

Given unsecured personal loans dominate the Indian market, there are scenarios where lenders might still ask for collateral due to the following reasons:

• Low credit score: All borrowers with a poor repayment history or a default earlier may be required to pledge assets.
• High loan amount: For significantly high loan amounts, lenders might prefer to reduce their risk by securing the loan with an asset to ensure that the overall risk becomes as less as possible.
• Irregular income or self employed: Individuals without a regular source of income may need to offer collateral to qualify for a loan.

In all such cases collateral can include gold, fixed deposits or even property.

What does the RBI say?

The Reserve Bank of India (RBI) has raised serious concerns about the surge in unsecured personal loans, especially among young borrowers. To reduce this systemic risk, the RBI has increased capital requirements for NBFCs and banks offering such loans. The primary objective is to ensure responsible lending and credit behaviour while protecting the broader financial system.

Conclusion

Hence, not all personal loans require collateral. Unsecured loans are widely available to aspirational borrowers with solid credit scores and stable incomes.

Still, if your credit profile is weak or you are seeking a high loan amount be ready for the possibility of offering security. Therefore, as always, it is prudent to evaluate and check your financial condition and compare offerings across banks to select the right loan type.

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