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What do lenders accept as collateral for loans?

Find out what you can use as collateral for a secured loan.

There are clear benefits for a lender when you provide collateral for a secured loan. But what are the benefits for you?

With lower interest rates and more lending options than you might otherwise have, providing collateral might sound appealing. But what do lenders accept as collateral for secured loans?

What is a secured loan?

When a borrower guarantees their loan payments by offering up an asset or property as collateral, the loan is secured. The collateral is an item or property that can be taken if the borrower fails to pay back the loan within its terms.

By securing a loan, you’re reducing some of the risk assumed by the lender. When you’re struggling to find a loan with reasonable terms, securing one with collateral could be an option to help you find a lower APR.

When should I consider a secured loan?

You might want to consider backing your loan with collateral in the following situations:

  • You don’t have good credit. This typically means a score below 650.
  • You already have a lot of debt. You’ll have trouble finding any personal loan with a debt-to-income ratio (DTI) above 43%. But even if it’s just under that number, you might not be able to qualify for unsecured financing.
  • You own a valuable asset (or assets). Your collateral is key to a secured loan. Owning a home or a car — without any debt — makes you eligible for larger loan amounts.
  • You’re a sole proprietor. If your business is a one-person show, you might have trouble proving you have steady income to a lender.

Why do some loans require collateral?

It reduces the risk to the lender. Lenders specializing in business loans typically want collateral of some kind to minimize their risk of taking you on as a borrower.

If your small business is new or hasn’t yet found its footing, you may not have the revenue to assure a lender that you’re able to keep up with potential payments. Promising an asset or property that’s worth the cost of the loan cuts that risk down.

The same principle applies to complex loans like those for cars, homes or even large personal purchases. All such loans can require collateral to ensure some form of repayment. Sometimes the collateral is the car, home or item you’re buying with the loan.

Collateral accepted by loan type

Personal loan
  • Personal real estate
  • Home equity
  • Personal vehicles
  • Paycheques
  • Cash or savings accounts
  • Investment accounts
  • Paper investments
  • Valuables like fine art, jewelry or collectibles
Business loan
  • Blanket lien
  • Business or personal real estate
  • Home equity
  • Business property like machinery or specialized equipment
  • Business or personal vehicle
  • Farm assets and products
  • Accounts receivable
  • Inventory
  • Natural reserves
  • Insurance policies
  • Investment accounts
  • Paper investments
  • Business savings accounts
  • Valuables like fine art, jewelry or collectibles
Auto title loan
  • The vehicle you’re purchasing
  • Personal vehicles you already own
  • Home equity
  • Investment accounts
  • Paper investments
  • Cash or savings accounts

Determining the value of your assets

Lenders typically offer you less money than the value of the asset you’re putting up as collateral — usually between 50% to 90% — although it can be even lower depending on the lender and the type of asset you’re using.

For example, if you’re using an investment portfolio as your collateral, in order to factor in the volatility of the investment, a lender might only offer you 50% of the value of the investments, just in case they lose value during the term of your loan.

When it comes to borrowing against your house, lenders generally let you borrow 80% of your loan-to-value ratio (LTV). To calculate your maximum borrowing, subtract your current loan balance from your property value and then multiply this figure by 80%. With auto title loans, you’re usually offered 25% to 50% of the value of the car.

Benefits and drawbacks of using collateral to secure a loan

  • Increases chance of approval. Since you’re offering up collateral and in turn minimizing your risk as a borrower, you increase your chances of approval. Even if you don’t have a perfect credit score, you have something that is valuable enough to pay back the amount of the loan if you find yourself unable to make your repayments.
  • Lower interest rates. When you have an excellent credit score, you’ll often see premium rates from lenders. While you may not have the best score, providing collateral could get you a better interest rate as a result of the lowered risk to the lender. Secured loans usually come with more competitive interest rates than unsecured loans.
  • More wiggle room. It’s always good to have room to negotiate. With increased chances of approval, lower interest rates and longer repayment terms, you can often get terms that fit your budget. Shortening the length of the loan will make it cheaper, while extending it can afford you smaller monthly repayments, however the cost of the loan will be higher.
  • Repossession. Defaulting on a secured loan means losing whatever that security is. A necklace from your great grandmother, your car or even your home can be taken if you promised them to the lender. While no one plans on not paying off their debts, life happens. Losing the collateral you put up could potentially end up making a bad situation worse.
  • Overspending. Offering up security usually gives you a little more flexibility. This could be dangerous, though. Taking out more money than you need will make your loan more expensive. If you’re tempted to grab extra cash to treat yourself, you might want to consider your financial situation first.
  • Longer term. A longer repayment period can sound like a great advantage if you want to lower your monthly repayments. However, it also means paying more interest over the life of the loan. A higher overall cost to your loan may not be worth the extra wiggle room from month to month.

Credit reporting for secured personal loans

Just like with unsecured personal loans, the lender you take out a secured personal loan with will report your payment history to the two credit bureaus: Equifax and TransUnion. If you make any late payments or default on the loan, it will remain on your credit report for six or seven years from the date of the original missed payment. However, if the collateral tied to your secured personal loan is repossessed or confiscated, this will add even more negative marks to your credit history.

How to get a personal loan without collateral

Not sure you want to put your house, car or grandmother’s silver on the line? Unsecured personal loans are actually more common than secured loans. The application process is nearly the same, except you don’t need to take the extra steps involved with appraising your collateral or providing proof of ownership.

You can typically get an unsecured personal loan with competitive rates if you have:

  • Good or excellent credit, which is usually a score of 650 or higher.
  • Steady income from a full-time job.
  • A low DTI, which will need to be well under 43%.

Bottom line

There are a variety of options when it comes to taking out a personal loan, whether you decide to secure it with collateral or go with an unsecured loan. When looking into a secured loan, consider your ability to repay the loan very seriously before taking one out. Defaulting on a secured loan means more than just damaging your credit score – you could also lose the asset you put up for security.

If a secured loan doesn’t exactly fit your needs, you can consider unsecured loans that don’t require collateral.

Frequently asked questions

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