Collateral loans guide and what to use

Collateral is something you pledge as security for the repayment of a loan — and if you fail to repay the lender can repossess the collateral and sell it. Collateral can make you less of a risk to a lender, and could give you a higher chance of approval.

How does a collateral loan work?

When using collateral, the lender is granted a lien on your valuable, which means the lender has legal rights to that collateral during the loan term.

For example: Secured car loans are secured by the vehicle you’re financing. If you can’t repay the loan, or have too many late or missed payments, the lender can repossess the car and sell it to cover your remaining loan balance.

Secured loans are less risky than unsecured loans to lenders, because you’re more likely to repay a secured loan when your collateral is at risk, and the lender can repossess it if you default. Because these loans are less risky, you may get more favorable rates, terms and potentially a higher amount than with unsecured lending options.

Types of collateral for different secured loans

You can’t use any collateral for each type of secured loan. For example, most banks won’t allow you to bring in a necklace or coin collection to secure a personal loan — you’d have more luck at a pawn shop with items like that.

Here are some examples of collateral you may be able to use (or need) for specific secured loans.

How can I use my fine art as collateral for a loan?

When using fine art as collateral for a loan, lenders that specialize in art as collateral generally provide loans from 30% to 80% of a piece’s value. Your artwork will likely need to meet some specific requirements, and the overall market will be used to assess the value of a piece. Supply and demand, auction data, records and information about the artist are just a few factors that can be used in determining if your piece is acceptable as collateral.

What factors affect my art collection’s value?

An appraisal will take place either virtually or in person to determine the value of your artwork. Considerations include:

• The artist.
• Previous auction record.
• Private ownership record.
• Condition of the artwork.
• Current market value of similar pieces.

What’s a CD loan?

A CD loan is a low-interest secured personal loan from a bank or credit union that uses your CD as collateral. A CD is an interest-gaining savings account you can’t access until a certain date. If you withdraw the funds early, you have to pay a fee — typically based on the interest you would have earned. CD loans allow you to access your balance at a lower cost.

Since you’re borrowing against a savings account, these loans typically have lower credit requirements and a faster turnaround than other types of funding from a bank or credit union. These are also sometimes called a deposit secured loan. It works similarly to a share certificate loan.

How much can I borrow?

That depends on how much money you have in your CD. You can typically borrow up to 100% of your CD’s account balance, though in some cases it’s capped as low as 75%.

There usually isn’t a minimum loan amount. In the rare case that there is, it’s usually around $500.

Secured loans and down payments

With many traditional secured loans, it’s wise to plan for a down payment requirement.

Home loans may require a down payment anywhere from 3% to 20% of the home’s selling price, depending on the loan you’re taking on. Auto loans can be more flexible in terms of down payment requirements, but many lenders expect a down payment around 10% to 20% of the vehicle’s selling price.

Other secured loans, such as HELOCs and home equity loans, usually require borrowers to pay closing costs — around 2% to 5% of the loan amount.

Determining your collateral’s value and LTVs

When you’re getting a loan with collateral, you’ll see the term loan-to-value ratio (LTV). It’s the amount you’re eligible to borrow divided by the value of your collateral, typically expressed as a percentage. LTVs often range from 50% to 90% and lenders generally won’t lend more than the collateral is worth.

Suppose you wanted to take out a loan backed by a $100,000 savings account with a maximum LTV of 70%. In this case, you’d be eligible to borrow up to $70,000.

In the case of homes and vehicles, the lender typically uses valuation tools to determine the value of the asset. With pawn shop loans where a number of valuables can be used as collateral, the pawn shop determines the item’s value in-house, then issues a loan that’s typically 40% to 60% of the item’s value.

How do I get a secured loan with bad credit?

There are secured borrowing options with poor credit. 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. There are also bad credit personal loans.

Comparatively, unsecured loans are harder to qualify for with bad credit — there’s nothing backing the loan and you have poor credit. With secured loans, there’s something of value to back the loan, which can make up for bad credit with some lenders — but you may face higher rates than someone with great credit.

Which lenders offer secured personal loans?

Most of the time, personal loans are unsecured. You’d be hard-pressed to find a traditional lender that allows you to put up valuables, such as jewelry, for a personal loan.

Most secured personal loans — that are nonbusiness related — are secured by collateral such as savings accounts, certificates of deposit (CDs) or investment accounts. They’re uncommon, but we managed to find a few lenders that offer types of secured personal loans.

Pros and cons of collateral loans

There are many pros of secured loans for both you and the lender — but there’s a lot at risk for you.

Alternatives to secured loans

If you’d rather not have collateral at risk, consider these other lending options:

• Unsecured personal loans. Personal loans can be used for nearly anything, and most don’t require any collateral. However, rates can get high and be tough to qualify for, especially with less-than-perfect credit.
• Credit cards. A form of revolving credit, credit cards are versatile. They’re relatively easy to qualify for, but the borrowing limit you can get is largely based on your credit history and rates can get high.
• Short-term loans. A sort of umbrella term, short-term loans usually refer to loans like payday loans or cash advances. These loans usually skip the credit check and are often repaid in a matter of weeks or months. But the cost can be high.
• Cash advance apps. These borrowing apps allow you to borrow smaller amounts of cash, typically below $250. There are no interest charges with these cash advances, but there are fees.