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What do lenders accept as collateral for loans?
Do you have enough assets to back a loan for better rates and terms?
Putting up collateral for a loan can get you more favorable rates and terms or help you qualify. But you’ll need to own something that a lender accepts as collateral — which you risking 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.
Personal loans
- Personal real estate
- Home equity
- Personal vehicles
- Paychecks
- Cash or savings accounts
- Investment accounts
- Paper investments
- Fine art, jewelry or collectibles
Auto loans
- The vehicle you’re purchasing
- Personal vehicles you already own
- Home equity
- Investment accounts
- Paper investments
- Cash or savings accounts
Business loans
- Blanket lien or UCC 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
- Fine art, jewelry or collectibles
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 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 straight-forward 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
Risky collateral comes with lower LTVs
If you have collateral with value that might change over time — like an investment account or a used car — you’ll likely find a lower LTV. For example, if you opt for an auto title loan, you’re usually offered 25% to 50% of the value of the car.
And if you’re using a share trading account 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 shares, just in case they lose value during the term of your loan.
But when it comes to borrowing against your house, lenders generally let you borrow 80% of its value. To calculate your maximum borrowing amount, subtract your current loan balance from your property value and then multiply this figure by 80%.
Which lenders offer secured loans?
Personal loan lenders
No | Yes | |
Yes | Yes | |
No | Yes | |
No | Yes | |
No | Yes | |
No | Yes | |
Yes | Yes | |
No | Yes | |
No | Yes | |
No | Yes | |
Yes | Yes | |
No | Yes | |
Yes | Yes |
Business financing lenders
No | Yes | |
No | Yes | |
Yes | No | |
Yes | Yes | |
Yes | Yes | |
Yes | No | |
Yes | Yes | |
Yes | Yes | |
Yes | Yes | |
Yes | No |
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
Pros
- Increases chance 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.
- 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 security could get you a better interest rate as a result of the lowered risk to the lender.
- More wiggle room. With increased chances of approval, lower interest rates and longer terms, you can often get terms that fit your budget. Cutting down the length of the loan might give you a lower overall cost, while extending it can afford you smaller monthly payments.
Cons
- Repossession. Defaulting on a collateral loan means losing whatever that collateral is. A necklace from your great grandmother, your car or even your home can be taken if you promised them to the lender.
- Overspending. Security generally affords you a little more leeway. This could be dangerous, though. Taking out more money than you need can mean additional interest payments.
- Longer term. A longer repayment period can sound like a great advantage if you want to lower your monthly payments. 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 lower monthly cost.
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.
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Ask an Expert
Can I secure a loan against life cover payout?
Hi Phumzile,
Thank you for getting in touch with Finder.
You may consider getting assisted living and bridge loans. With an assisted living or bridge loan, you can typically get approved in as little as one day. You’ll have up to 12 months to pay it off, and the costs can sometimes be split between as many as six people, easing the burden on any one individual. These loans are unsecured and lenders might require all co-applicants to have good credit to qualify for a competitive rate. I’m afraid that you need to research and get in touch with your chosen lenders on this matter.
I hope this helps.
Thank you and have a wonderful day!
Cheers,
Jeni
Can I secure a personal loan against a packet of crisps? I know its unconventional but they were brought from Waitrose and are really nice (cheese and Onion flavour).
Hi Harry,
Thanks for getting in touch with finder. I hope all is well with you. :)
It depends on the lender you choose Harry. It would be a good idea to directly get in touch with your lender and confirm if they accept this type of security to provide you with a loan.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua
I have a Probate account and can’t touch money yet, but I need cash now. Can I borrow against it?
Hi Troy,
Thanks for your question! You might be eligible for an inheritance advance if you have a probate account that you can’t touch yet. You can learn more about how this works by checking out our article on how inheritance funding works.
Hope this helps!
Anna
How do banks value your car when using it as an assest for secured personal lo as n
Hi Zmie,
Thank you for leaving a question.
Individual banks use a variety of sources to appraise a vehicle’s value. Your car’s value depends on factors like color, age, mileage, car crash history, current condition just to name a few. You may need to speak to a bank representative to get deeper into knowing what factors are being taken into consideration when creating the value for your vehicle. Hope this helps!
Cheers,
Reggie
Can I a collateral loan against living annuity investment ?
Hi Zanele,
Thanks for getting in touch with finder. I hope all is well with you. :)
Generally, you can’t use your living annuity investment as a collateral loan. One reason is that when you convert annuity to a source of income, there is no asset left to serve as a collateral. However, you may still want to discuss this with your lender and see if there are other options available for you.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua