What do lenders accept as collateral for loans?

Putting up collateral for a loan allows you to cash in on the value of something you already own, like a car or home, while avoiding the taxes you might pay if you sold that item. Securing a loan with collateral can get you more favorable rates and terms or help you meet a lender's minimum requirements. But you risk losing if you can’t pay it back.

What is collateral?

Collateral is something you own with cash value that you pledge to give to a lender if you can’t pay back a loan on time. It makes a borrower seem like less of a risk to a lender — either way, it’ll get its money back.

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 or larger amount.

Common types of collateral

Find out what you can use for collateral based on the type of loan you’re taking out.

How do collateral loans work?

Collateral loans are also known as secured loans. They work by using something the borrower owns to back their promise to repay the lender. If the borrower fails to repay their loan, the lender can then take the collateral to make up for the lost repayments.

Typically, how much you can borrow depends on the value of the collateral. It often involves more paperwork than an unsecured term loan since you might need to get your collateral appraised by an expert or file a UCC lien.

How inheritance works as collateral

Estate loans or probate loans are a type of inheritance financing that uses real estate assets that you are set to inherit as collateral. The legal process of transferring an inheritance takes months or years, and inheritance financing allows you to access those assets earlier.

A true estate loan works like any secured loan. But some lenders use the term "estate loan" to refer to an inheritance advance. Rather than charging interest, inheritance advances come with a fixed fee that can reach 40% of your inheritance's value. That's much more expensive than a personal loan, which comes with an average APR of around 9%, according to the Federal Reserve. Ask lenders how their estate loans work before you apply.

How much is my collateral worth?

How much your collateral is worth depends on what type of collateral you have. Finding the value of your collateral can be as straightforward as checking the balance of a bank account or as complicated as having your family heirlooms appraised by an expert.

Before you get your collateral appraised, ask your lender what procedures borrowers typically follow for that type of collateral. They might have some suggestions or requirements for who and how you determine your collateral’s value.

What is LTV?

The loan-to-value ratio (LTV) is the amount you’re eligible to borrow divided by the value of your collateral, typically expressed as a percentage. LTVs typically range from 50% to 90%, though it’s possible to find LTVs above 100% on loans for a specific purchase — such as a car loan.

How does this work? Say you wanted to take out a loan backed by a $100,000 savings account with an LTV of 70%. In this case, you’d be eligible to borrow up to $70,000.

A deeper dive into how secured loans work versus unsecured loans

Which lenders offer secured loans?

Personal loan lenders

Business financing lenders

When should I consider a collateral 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 around 670.
• 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, 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.

Business loan collateral

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 like a bank account that’s worth the cost of the loan cuts that risk down.

You can learn more about what types of collateral lenders might accept from businesses by reading our guide.

Loans backed by a purchase

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.

Benefits and drawbacks of collateral loans

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 three credit bureaus: Experian, Equifax and TransUnion.

If you make any late payments or default on the loan, it will remain on your credit report for 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
• Steady income from a full-time job
• A low DTI

Bottom line

There are options aplenty when it comes to taking out a personal loan with or without securing it. 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 lose the asset you put up for security.

Explore our loan guides to learn more about how different options work.

Frequently asked questions

If I have a poor credit score, am I still eligible for a secured loan?

You might be. The requirements vary by lender, but you may be able to get a secured loan with less-than-perfect credit if your asset matches the lender’s criteria and you can prove your ability to repay the loan. Otherwise, you can consider bad credit personal loans.

What can I use a secured loan for?

In the case of personal loans, you can usually use the loan for any legitimate purpose. Car loans are typically restricted to cars or other recreational vehicles. Business loans are generally for business purposes only.

What will I need to apply for a loan?

Different lenders require different information and documentation. Generally, you’ll need to provide your personal contact information, Social Security number, date of birth, bank account information and employment and income information. For a business loan, you’ll also need to supply relevant information about your business.