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If you are getting a secured personal loan, you’ll need to use collateral, which often can be in the form of money in a bank account, investments, real estate, or a vehicle. When you put up this kind of asset, the lender can feel more confident about offering the loan. If you, the borrower, were to default on the loan, the lender knows it can claim the collateral. For the more common unsecured type of personal loan, the amount doled out is only secured by a borrower’s promise to repay the funds, rather than collateral.
Learn more here about how secured personal loans work and what can you use as collateral for a loan.
Key Points
• Secured personal loans require collateral, such as real estate, vehicles, bank accounts, investments, or valuable items, providing lenders with an asset to claim if the borrower defaults.
• Potential advantages of secured loans include access to larger loan amounts, lower interest rates, and more favorable terms, especially for borrowers with lower credit scores.
• Risks of secured loans involve potential loss of assets if payments are missed, as well as a longer and more complex application process due to asset valuation requirements.
• Unsecured personal loans do not require collateral, making them less risky for borrowers, but generally offer smaller loan amounts and higher interest rates due to increased risk for lenders.
• Building credit before applying for a loan can help borrowers qualify for unsecured loans, avoiding the need to put valuable assets at risk while still accessing competitive rates and terms.
Common Types of Collateral for Secured Loans
Wondering what can I use as collateral for a personal loan? If you do opt for a secured type of loan, here’s what can usually be used as collateral:
• Real estate you own. You can use a house as collateral for loan or you can use other real estate such as land or a commercial property.
• Vehicles (typically cars and trucks, but boats are possible, too)
• Bank accounts and investments
• Jewelry, art, antiques, or collectibles
What Can’t Be Used as Collateral
There are some assets that a lender typically won’t accept as collateral for a personal loan. These include:
• Real estate that is heavily mortgaged
• Retirement accounts, such as a 401(k)
• Future wages
• Hard-to-value or hard-to-sell art or antiques
Lenders typically like to see as collateral items that can be liquidated quickly, for immediate cash in the event that a borrower defaults on a loan. As you’re thinking about what can be used as collateral for a personal loan, you’ll want to avoid any asset that you plan to sell before the personal loan will be paid off, as entangling that asset in your loan will restrict your ability to dispose of it.
Secured Loans: Personal Loans With Collateral
Requiring collateral for most types of personal loan is uncommon, but not unheard of, depending on the kind of personal loan you get. Generally, secured loans offer more competitive interest rates, larger loan amounts, and more favorable terms.
But if a borrower fails to repay their secured loan, they’ll receive a notice letting them know they’re in default and giving them an opportunity to become current on payments. If the borrower doesn’t pay up, that can lead to loss of the collateral.
There’s a wide range of possibilities when it comes to types of collateral that can be used to secure a personal loan. What can you use as collateral for a loan? Some common examples of loan collateral include:
• Real estate: One option for personal loan collateral is to use a house as collateral for a loan or use other real estate you own, such as an investment property. Even if you don’t fully own your home, you may be able to use the equity you do have as collateral. Just make sure you understand the risk involved because you could lose your home if you’re unable to make payments.
• A vehicle: When you use an auto loan to purchase a car, the vehicle is the collateral. But some lenders allow you to use the equity you have built up in a vehicle to get funds. This may be a better choice than, say, a payday loan. However, you risk losing that vehicle if you can’t make the payments.
• Bank or investment accounts: You might be able to use a certificate of deposit (CD) or other investment account as collateral. Just know that using these accounts as collateral might prevent you from accessing the funds in the accounts, which is a downside to consider.
Beyond these more standard items, other things that could be used as collateral for a secured personal loan include savings accounts, fine art, jewelry, collectibles, and more.
If you’re struggling to come up with an asset that might be used as collateral and you don’t think you can qualify for an unsecured personal loan, one option might be to apply for a personal loan with a co-borrower.
Using Your Home as Collateral
There are several scenarios in which your home can be collateral for a loan. When you purchase a home using a mortgage, the property effectively serves as collateral. And if you obtain a home equity loan, you are borrowing against the equity you have built up in your house. A home might also be collateral for a large personal loan.
In any situation in which your home serves as collateral, it’s essential to have a plan in place to make payments on your loan, and to understand the risk to your home if you fail to repay what you have borrowed. In the event of default, using your home as collateral means you could lose your place.
Potential Advantages of Secured Loans
If you need to borrow a larger sum of cash, then you might find more success if you put up collateral. A borrower whose credit score isn’t as high as might be required for a riskier unsecured personal loan may find it easier to get approved for a personal loan that’s secured.
Plus, you might receive more favorable rates and/or terms because the lender has the security of knowing it can possess the collateral if the loan is not paid back. As a personal loan calculator can demonstrate, a lower interest rate can add up to savings quickly.
Downsides of Secured Personal Loans
The biggest downside of secured personal loans is that if you fail to make your payments, you could lose the asset that’s securing the loan. Given that houses, investment accounts, and vehicles are common examples of personal loan collateral, that could be a big blow.
Another downside of secured vs. unsecured personal loans is that the application process is generally longer and more involved. This is because the lender needs to assess the asset being put up as loan collateral to verify its value.
Unsecured Personal Loans
As mentioned, unsecured personal loans aren’t backed by collateral. Instead, lenders just need a borrower’s signature promising they’ll pay back funds (as well as a review of the applicant’s credit history and other financial fitness indicators, of course). Because of this, you may hear unsecured personal loans referred to as signature loans, good faith loans, or character loans.
Student loans are a type of unsecured loan, though they have their own unique terms and repayment options. So are many credit cards, although they tend to have higher rates than what’s typical on an unsecured personal loan. There are also personal loans for major life events, such as weddings or medical bills.
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Potential Advantages of Unsecured Loans
You can typically obtain unsecured personal loans on short notice. If the borrower has sufficient income for a loan and a good credit score and history (among other factors), rates can be competitive compared to those of secured loans.
And, of course, with an unsecured personal loan, you wouldn’t be tying up any assets or putting them at risk if you struggle with repayment.
As with secured personal loans, unsecured loans of this type can offer tremendous flexibility, such as using the funds as a vacation loan or for almost any other purpose.
Downsides of Unsecured Loans
Because unsecured loans are riskier for the lender, rates are typically higher than those of secured loans. Additionally, amounts available to borrow are usually smaller.
While it’s true that there isn’t an asset a lender can repossess for nonpayment, lenders can still take action on unpaid unsecured personal loans. Lenders can report the account as in default to the credit bureaus, send the account to collections, and take a borrower to court for nonpayment. This can significantly affect a person’s credit for years to come.
Building or Repairing Credit to Avoid Loan Collateral
If your credit score or credit history is preventing you from getting an unsecured loan, it might make sense to take time to work on your credit score. Strengthening a weak credit score doesn’t happen instantly, so cultivating good credit habits won’t be the magic solution if you need a loan now. But if you’d prefer not to put up an asset as collateral, it might be a worthwhile step prior to taking out a personal loan.
Steps to Build A Credit Score
Some steps to build credit include:
• Pay all existing loans on time, and make sure not to miss any payments.
• Get your monthly bills, such as your rent payments or utility bills, added to your credit report by a third-party service.
• Keep your credit utilization (meaning the total percentage of your available credit you’re using) below 30%.
• Get caught up on any outstanding balances or past-due debts.
• Limit applications for new accounts.
• Maintain older credit accounts, even if you only use them occasionally. They can help build the length of your credit history, which may help build your score.
• If possible, responsibly manage a mix of credit accounts, such as both lines of credit and installment loans.
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Making a Choice: Secured or Unsecured
Whether a secured or unsecured personal loan is right for you depends on your specific need, financial situation, and credit history, among other factors, though the common uses for personal loans apply to both.
Factors to Consider When Choosing a Loan Type
If you’re looking for higher borrowing limits and potentially lower rates, or if you know you may not feel your application is particularly strong, a secured personal loan could make more sense. Just think carefully about what asset you decide to put down as collateral, as you do need collateral for a loan of this type.
But if you have strong credit and don’t need to borrow as much money, an unsecured personal loan might make sense. That way, you won’t have to worry about loan collateral. Just remember that doesn’t mean you’re off the hook if you don’t repay the loan. Lenders can report the defaulted loan, put it in collections, and even take you to court.
Recommended: The Difference Between Personal Loan and Credit Card Debt
The Takeaway
While less common than unsecured personal loans, secured personal loans can be a useful option for some borrowers. They involve putting up collateral (such as bank accounts, investments, real estate, and vehicles), which can qualify you for lower interest rates and higher borrowing limits. Which kind of loan is right for you will depend on your particular needs and credit history.
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FAQ
Can you get a personal loan without collateral?
You can get a personal loan without collateral. These are called unsecured personal loans, and though they may have higher interest rates and lower borrowing limits than secured loans, they are the most common kind of personal loan.
Does the loan amount impact how much collateral is needed?
The loan amount a borrower requests often impacts how much collateral is needed. That is because the lender needs to know that it can recoup the amount of funds loaned if the buyer were to default. So for this reason, a $50,000 secured personal loan would require more valuable collateral than a $5,000 loan.
Do secured loans have lower interest rates than unsecured loans?
Typically, secured loans will have lower interest rates than unsecured loans. The reason: The presence of collateral means the loan is less risky for the lender than an unsecured loan.
How can I qualify for an unsecured personal loan?
To qualify for an unsecured personal loan, you usually need to prove you are creditworthy to lenders. That means having a solid credit history and score. While personal loans may be available to people with credit scores of 580 and up, the more favorable rates are typically reserved for those with scores of 700 and higher.
What happens if I default on a secured loan?
If you default on a secured loan, the lender can claim the collateral and sell it to cover the debt.
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