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What do lenders accept as collateral for loans?
Find out what you can use as collateral for a secured loan.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured on it.
What is a collateral loan?
Also known as a secured loan, a collateral loan is when the borrower guarantees the cost of their loan by offering up an asset or property as security. The collateral is an item or property that can be taken if the borrower fails to pay back the loan within its terms.
By securing a loan, you’re reducing some of the risk assumed by the lender. When you’re struggling to find a loan with reasonable terms, securing one with collateral could help you lock in a lower annual percentage rate (APR) and better loan terms.
When would I consider a secured 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 below 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 a steady income to a lender.
Compare collateral loans
Table: sorted by overall cost for comparison (representative APRC)
Overall representative example
If you borrowed £46,000 over a 15-year term at 8.40% p.a. (variable), you would make 180 monthly payments of £499.13 and pay £89,843.40 overall, which includes interest of £38,853.40, a broker fee of £3,995 and a lender fee of £995. The overall cost for comparison is 10.7% APRC representative.
If you borrowed £46,000 over a 15-year term at 8.40% p.a. (variable), you would make 180 monthly payments of £499.13 and pay £89,843.40 overall, which includes interest of £38,853.40, a broker fee of £3,995 and a lender fee of £995. The overall cost for comparison is 10.7% APRC representative.
Why do some loans require collateral?
It reduces the risk to the lender. Lenders specialising in business loans typically want collateral of some kind to minimise their risk of taking you on as a borrower.
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 that’s worth the cost of the loan cuts that risk down.
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.
What types of collateral can I use on a loan?
While you could technically use any valuable asset as collateral against a secured loan, lenders will generally only accept the equity you own in your house as security.
However, you may also be able to use a car, or the equity you have in another property, as collateral. If you’re planning on getting a loan to purchase an expensive asset, the lender may request that the item itself is used as security, in order to reduce the risk they’re taking on by giving you a loan.
Collateral accepted by loan type
Personal loan
- Personal property
- Home equity
- Personal vehicles
- Payslips
- Cash or savings accounts
- Investment accounts
- Paper investments
- Such valuables as fine art, jewellery or collectibles
- The vehicle you’re purchasing
- Personal vehicles you already own
- Home equity
- Investment accounts
- Paper investments
- Cash or savings accounts
Business loan
- Blanket lien
- Business or personal property
- Home equity
- Business property like machinery or specialised 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, jewellery or collectibles
- Warning: Late repayments can cause you serious money problems. For help, contact the government’s free money advice website, MoneyHelper.
Determining the value of your assets
Lenders typically offer you less money than the value of the asset you’re putting up as collateral — usually between 50% and 90% — though it can be even lower depending on the lender and the type of asset you’re using.
For example, if you’re using an investment portfolio 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 investments, 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 your loan-to-value ratio (LTV). With car loans, you’re usually offered 25% to 50% of the value of the car.
Benefits and drawbacks of using collateral to secure a loan
Pros
- Increases chance of approval. We’ve talked a lot about mitigation of risk. That reduction is what can increase your chances 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. It’s always good to have room to negotiate. 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 secured loan means losing whatever that security is. A necklace from your great grandmother, your car or even your home can be taken if you promised them to the lender. While no one plans on failing to pay off their debts, life happens. Losing the collateral you put up could potentially end up making a bad situation worse.
- 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. If you’re tempted to grab that extra cash to treat yourself, you might want to consider the whole of your financial wellness first.
- 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 extra wiggle room from month to month.
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 these credit bureaus: Experian, Equifax and Crediva. 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.
If a secured loan doesn’t exactly fit your needs, you can consider unsecured loans that don’t require collateral.
Frequently asked questions
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I need to borrow £1500 to pay a bill. I know it’s only for a few days when it will be paid in full. Is this possible?
Hi Avs,
Thanks for getting in touch with Finder. I hope all is well with you. 😃
Yes, it is possible for you to pay your bills earlier. However, you would need to find a lender who allows you to do so. Some lenders don’t allow their borrowers to make early repayment or they charge a certain fee when they do. Alternatively, you can still choose any lender and simply accept their loan term.
If in case you are looking for a list of lenders, please go to this page. On that page, you will see a table that allows you to conveniently compare personal loans based on total payable, monthly repayment, and APR. Once you found the right one for you, click on the “Go to site” green button to learn more or initiate your application.
Please make sure that you’ve read the relevant T&Cs or PDS of the loan products before making a decision. Moreover, check the eligibility requirements as well and consider whether the product is right 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
I own my home with no mortgage. I have terrible credit. I need a 15k loan secured on my property paid back over 20 years for a car needed to get a job and home improvements and to consolidate my debts
Hi Claire,
Thank you for reaching out to finder.
Since you mentioned that you have a property you can use as a collateral, you can review and compare lenders offering secured loans on this page.
Before applying, please ensure that you meet all the eligibility criteria and read through the details of the needed requirements as well as the loan agreement terms to help you decide which best suits your needs.
I hope this helps.
Cheers,
Charisse