Do you have enough assets to back a loan for better rates and terms?
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
- Personal real estate
- Home equity
- Personal vehicles
- Paychecks
- Cash or savings accounts
- Investment accounts
- Paper investments
- Such valuables as fine art, jewelry or collectibles
- Blanket lien
- 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
- Such valuables as fine art, jewelry or collectibles
- The vehicle you’re purchasing
- Personal vehicles you already own
- Home equity
- Investment accounts
- Paper investments
- Cash or savings accounts
How do collateral loans work?
Collateral loans, also known as secured loans, work by using something the borrower owns to back their promise to repay the lender. 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
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’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.
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%.
With auto title loans, you’re usually offered 25% to 50% of the value of the car.
Which lenders offer secured loans?
Personal loan lenders
| Provider | Secured loans | Unsecured loans |
|---|---|---|
| Avant |  |
 |
| Laurel Road | |
|
| LendingClub | |
|
| LendingPoint | |
|
| MoneyLion | |
|
| OneMain Financial | |
|
| Payoff | |
|
| Prosper | |
|
| SoFi | |
|
| Upstart | |
|
Business financing lenders
| Provider | Secured loans | Unsecured loans |
|---|---|---|
| Able Lending | |
|
| Bitbond | |
|
| FastPay | |
|
| Kabbage | |
|
| LendingClub | |
|
| Main Street | |
|
| National Business Capital | |
|
| OnDeck | |
|
| SmartBiz | |
|
| Swift Capital | |
|
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 680.
- 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
- 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.
- 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
Find an unsecured personal loan
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.
You can learn more about how personal loans work by checking out our guides to personal loans or business loans.
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 you 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
What companies are rated best for obtaining collateral assigned term life insurance?
Hi Gina,
Thanks for getting in touch with finder. I hope all is well with you. :)
We currently don’t have a list of companies that use life insurance as a collateral for a loan. However, some business loan providers do consider life insurance as a collateral. You can find our list of business loan providers on this page.
On that page, there’s a table that allows you to compare your options. From there, you can click on the “Go to site” green button and learn more about how you can use your life insurance to get a loan. You can then directly discuss various options directly with the provider.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua
can I use my life insurance policy as collateral tor a personal loan
Hi Daniel,
Thanks for leaving a question on finder.
Typically if you apply for a business loan, they accept insurance policies as collateral- not for personal loans. However, you can discuss your options directly with the lenders in this page to be sure if they accept insurance policies. Good luck!
Cheers,
Joel
Is making a collateral payment towards a person loan a thing? Or does it have to be an item you own (not money)?
Hi Lauren,
Thank you for reaching out to finder.
Yes, your Collateral should either be an Asset or Property that you own. For Personal Loans there is a lot of type of collateral that is accepted by Lenders:
*Personal real estate
*Home equity
*Personal vehicles
*Paychecks
*Cash or savings accounts
*Investment accounts
*Paper investments
*Such valuables as fine art, jewelry or collectibles
I hope this helps.
Let us know if there is anything else that we may assist you with.
Cheers,
Ash
I’m in Africa zambia, can I be able to borrow?
Hello Mr. T,
Thank you for your comment.
You may need to check with your local lenders as the products featured on our pages are offered to American citizens and residents only.
Regards,
Jhezelyn
What can I use as a personal item with serial number for a loan ?
Hi Kay,
Thanks for leaving a comment on finder.
We have outlined the usual acceptable collaterals for each loan type above. It is not necessary for your collateral to have a serial number. As long as it has value, then it would be acceptable. Please note that most lenders will not accept electronic devices since they depreciate in value real quick.
Cheers,
Joel
Can I use tv’s or phones for collateral?
Hello Katrina,
I’m afraid TV or phones could not be considered as loan collaterals as they are low in value and easily depreciates in a short span of time. Most of the acceptable collaterals either do not depreciate or have high value. Generally acceptable collaterals are listed on this page for your perusal.
Hope this helps!
All the best,
Ron