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Collateral loans guide and what to use

Putting up collateral increases your chances of getting approved for a loan.

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.

Type of secured loanCollateral required or accepted
MortgageThe house you’re financing.
Auto loanThe vehicle you’re financing.
Home equity loansThe home you have equity in.
Vehicle title loansThe owned vehicle you’re using to secure the loan.
Secured credit cardsCash deposit, usually $200 to $500.
Secured personal loanSavings account, certificate of deposit (CD), personal vehicle, inheritance or investment accounts.
Secured business loansBusiness assets, accounts receivable, property like machinery or specialized equipment, investment accounts and more.
Pawn shop loansValuables such as jewelry, electronics or appliances.

Who is most likely to be researching collateral for loans?

Finder data suggests that men aged 25-34 are most likely to be researching this topic.

ResponseMale (%)Female (%)
65+2.51%1.60%
55-644.71%5.81%
45-547.82%8.62%
35-4411.82%11.02%
25-3415.03%11.32%
18-2411.22%8.52%
Source: Finder sample of 998 visitors using demographics data from Google Analytics

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.

LenderAPRLoan amountsCollateral accepted
Upgrade8.49% to 35.99%VariesPersonal vehicle less than 20 years old with a clean title
First Tech Federal Credit UnionStarting at 3% to 5%, depending on loan type$500 to $50,000CD or savings account
OneMain Financial18% to 35.99%$1,500 to $20,000Personal vehicle
Regions Bank13.5% to 26.50%$250 to $2,000, depending on collateralCD or savings account

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.

Pros

  • Pay over time. Secured loans allow you to get big-ticket items and pay for it over time.
  • Increases chance of approval. With something to back the loan, there’s less risk for the lender. Most secured loans are easier to qualify for than unsecured ones, even if you have poor credit.
  • Lower interest rates. Traditionally, secured loans have lower interest rates than unsecured loans.
  • More options. You’re less of a risk as a borrower with some collateral, so more lenders may be willing to lend to you.

Cons

  • Repossession. Defaulting on a collateral loan means losing whatever that collateral is. Soon after repossession, the lender can sell the collateral to help cover your remaining loan balance.
  • Items are locked. If you put up something for collateral, such as a vehicle, then you can’t sell that car unless you pay off the lien.
  • Overspending. With collateral, you may be offered higher loan amounts — be careful not to take on more than you can chew.

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.

Written by

Bethany Hickey

Bethany Hickey is the banking editor and personal finance expert at Finder, specializing in banking, lending, insurance, and crypto. Bethany’s expertise in personal finance has garnered recognition from esteemed media outlets, such as Nasdaq, MSN, Yahoo Finance, GOBankingRates, SuperMoney, AOL and Newsweek. Her articles offer practical financial strategies to Americans, empowering them to make decisions that meet their financial goals. Her past work includes articles on generational spending and saving habits, lending, budgeting and managing debt. Before joining Finder, she was a content manager where she wrote hundreds of articles and news pieces on auto financing and credit repair for CarsDirect, Auto Credit Express and The Car Connection, among others. Bethany holds a BA in English from the University of Michigan-Flint, and was poetry editor for the university’s Qua Literary and Fine Arts Magazine. See full profile

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22 Responses

    Default Gravatar
    PhumzileMarch 29, 2019

    Can I secure a loan against life cover payout?

      AvatarFinder
      JeniMarch 31, 2019Finder

      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

    Default Gravatar
    HarryJanuary 10, 2019

    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).

      AvatarFinder
      JoshuaJanuary 14, 2019Finder

      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

    Default Gravatar
    TroyOctober 30, 2018

    I have a Probate account and can’t touch money yet, but I need cash now. Can I borrow against it?

      AvatarFinder
      AnnaNovember 5, 2018Finder

      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

    Default Gravatar
    ZmieOctober 8, 2018

    How do banks value your car when using it as an assest for secured personal lo as n

      AvatarFinder
      johnbasanesOctober 11, 2018Finder

      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

    Default Gravatar
    ZaneleSeptember 21, 2018

    Can I a collateral loan against living annuity investment ?

      AvatarFinder
      JoshuaSeptember 24, 2018Finder

      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

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