What is security cheque

A security cheque is a signed, often undated cheque provided by a borrower to a lender as collateral or a guarantee for a financial obligation, such as a loan or mortgage. Its primary purposes include:

• Risk Mitigation: It acts as a legal fallback for the lender if the borrower defaults on repayments.
• Legal Recourse: Under the Negotiable Instruments Act, 1881, a bounced security cheque provides the lender with a basis for legal action.
• Psychological Commitment: It reinforces repayment discipline for the borrower.

These cheques are generally not encashed unless the borrower violates the terms of the agreement.