A collateral loan is a loan secured by an asset like a home, car, or piece of jewelry. As a borrower, you agree that the lender can seize your asset if you default on the loan. This reduces the lender’s risk, which can end up being advantageous for you.
Here’s a closer look at the ins and outs of collateral loans, including how they work and the pros and cons.
How do collateral loans work?
Collateral loans require you to pledge property, such as a car or a home, to get the loan. The lender then places a lien on your property while you’re making payments. If you fail to repay the loan according to the contract, the lender can seize and sell your property to recover its losses.
Collateral loans are often structured as term loans with installment payments. The lender provides you with a lump sum amount upfront and you repay it, plus interest and fees (if applicable), over a set term.
Pros and cons of collateral loans
Collateral loans come with various perks but also a few disadvantages. Here’s what you should know:
Pros
- Easier to qualify: Collateral loans come with more lenient eligibility requirements than their unsecured counterparts, so they can be easier to get if you have poor or no credit.
- Lower interest rates than unsecured loans: Lenders often offer lower interest rates and fees on collateral loans than unsecured loans due to the lower level of risk they’re assuming.
- Higher loan limits: Collateral may enable lenders to offer higher loan amounts due to the ability to recoup their funds regardless of a default.
- Longer repayment periods: Collateral can enable a lender to trust you with longer repayment periods, such as 30 years on a mortgage.
Cons
- Collateral at risk: If you default on a loan payment, the lender can seize your property without needing to sue you.
- Longer application process: Lenders often need to inspect and/or appraise collateral, which can cause a longer loan application and approval process.
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How to apply for a collateral loan
Here are the general steps you can take to apply for a collateral loan:
- Compare lenders: You’ll need to find reputable lenders that offer the loan type you need. For example, if you’re looking for a mortgage, shop around for home loan lenders. If you want a secured personal loan, look for personal loan lenders. In addition to the loan type, look for companies with suitable eligibility requirements for your financial situation, competitive rates, and good reviews from past borrowers. Once you find a few potential lenders, contact them to request quotes.
- Submit an application: You’ll often need to provide information about your living situation, debt, income, employment, assets, and collateral. Lenders also typically require documents like pay stubs or tax returns to back up your claims.
- Review and sign the loan agreement: Once you qualify, you’ll be sent a loan agreement to review and sign. Carefully look over your loan’s terms before signing.
- Begin repaying your loan: Repay your loan on time to avoid late fees, losing your collateral, and damaging your credit. Set up autopay to avoid missing any payments.
The aim is to find out the loan amount, annual percentage rate (APR), term, fees, monthly payment, and total cost lenders are willing to offer you. Then, you can compare multiple offers side by side to see which is the best fit.
Good to know: To qualify, lenders typically require you to share your personal, income, credit, and asset information. Additionally, you’ll need to provide details about your collateral and get an appraisal to evaluate its fair market value.
Advertiser DisclosureOverview
Lightstream is one of three Credible partner lenders to offer loan amounts up to $100,000, which makes it ideal for financing large expenses like home improvements or weddings. Funds are available as soon as the same day you apply, and you'll have up to 12 years to repay certain types of loans, including home improvement loans, RV loans, and boat loans. There are no origination fees, and rates are low — Lightstream's lowest APR beats SoFi's advertised lowest APR by 1 percentage point. But you'll need good credit to qualify.
Unlike most lenders, Lightstream does not let you prequalify on its site. Nor does it provide a contact phone number next to its customer service hours on its website.
Repayment terms
2 - 12 years, depending on loan purpose
Eligibility
Available in all states except RI and VT
Time to get funds
As soon as the next business day
Loan uses
Credit card refinancing, debt consolidation, home improvement, and other purposes
Read full reviewOverview
Upstart has one of the lowest available APRs of Credible partner lenders and of all non-partners we reviewed, making it a good choice for well-qualified applicants. However, it's also is one of few lenders that doesn't have a minimum credit score requirement (if you apply on the lender's website), which makes it an option if you have bad credit or no credit history. Upstart may charge an origination fee as high as 12%, but good-credit borrowers may not be charged one at all.
Trustpilot gives Upstart 4.9 stars, which is the highest of all lenders we reviewed.
Time to get funds
As soon as 1 to 3 business days
Loan uses
Pay off credit cards, consolidate debt, relocate, make a large purchase, and other purposes
Read full reviewOverview
Discover Personal Loans offers low APRs, repayment terms up to seven years, no origination fees, nationwide availability, and doesn't require your Social Security number to prequalify on its site. You'll need to have an annual income of at least $40,000, and a FICO score 660 or higher, to be eligible. If your credit score is fair or poor, you'll need to go elsewhere, as Discover doesn't allow cosigners.
Funds are available as soon as the next business day after loan approval.
Eligibility
Available in all 50 states
Time to get funds
Funds can be sent as soon as the next business day after acceptance
Loan uses
Auto repair, credit card refinancing, debt consolidation, home remodel or repair, major purchase, medical expenses, taxes, vacation, and wedding
Read full reviewOverview
Upgrade has a suite of features that make it a very attractive lender: competitive interest rates, discounts for direct pay and autopay, as soon as same-day funding, up to seven-year repayment terms, and nationwide availability. Plus, loans are available to fair-credit borrowers, and you don't need to input your Social Security number to prequalify on the website. Upgrade even offers secured personal loans, which is not common among lenders.
However, Upgrade does charge an origination fee of 1.85% to 9.99%. You must have a FICO score of at least 600 and a minimum income of $25,000 annually to qualify.
Loan amount
$1,000 to $50,000 ($3,005 minimum in GA; $6,600 minimum in MA)
Loan uses
Credit card refinancing, debt consolidation, home improvement, major purchase, other
Read full reviewOverview
LendingClub is a solid lender for good credit borrowers and some fair credit borrowers that apply directly on its website. It's easy to prequalify with LendingClub, especially if you're uncomfortable providing your Social Security number, as the company doesn't require it at the prequalification stage. (You will need to provide it if you move forward with a full application.)
While prequalification is not a guarantee that you'll be approved for a loan, LendingClub does a better job than most other Credible partner lenders at approving applicants that have successfully prequalified. In other words, you're less likely to have your application declined once you apply (if you've already prequalified). LendingClub may charge an origination fee between 3% and 8%.
Eligibility
Available in all 50 states
Loan uses
Debt consolidation, paying off credit cards
Read full reviewOverview
SoFi stands out for offering no-fee personal loans with competitive rates, high loan amounts, long loan terms, discounts for autopay and direct pay, and funding as soon as the same day. Plus, SoFi prioritizes convenience for existing and potential customers with features like live chat and an easy prequalification process that doesn't require your Social Security number.
The main catch is that you need to qualify for a loan with SoFi, which can be hard to do if you don't have good credit. You also won't be able to apply with a cosigner, since SoFi doesn't accept cosigners; nor does it offer secured personal loans.
Fees
Option to pay an origination fee (up to 6%) in exchange for a lower rate
Time to get funds
Typically within a few days, given approval and bank account verification, but sometimes within the same day
Loan uses
Solely for personal, family, or household uses
Read full reviewOverview
Best Egg is a solid lender for a wide range of borrowers and, notably, scored second for personal loan satisfaction in J.D. Power's Consumer Lending Study. It offers competitive rates, reasonable loan terms and amounts, and personal loans for fair credit. You'll need a FICO score of at least 600 to qualify, but the lower your score, the higher your APR may be. The APR includes the interest rate and origination fees, which range from 0.99% to 8.99% with Best Egg.
Note that if you successfully prequalify with Best Egg, you may be more likely to be approved for the loan relative to other lenders you prequalify with. Based on Credible data, borrowers who chose to apply for a loan with Best Egg were more than twice as likely to be approved (relative to most other Credible partners).
Fees
Origination fee, late fee, unsuccessful payment fee, check processing fee
Eligibility
Available in all states except DC, IA, VT, and WV
Time to get funds
As soon as 1 to 3 business days after successful verification
Loan uses
Credit card refinancing, debt consolidation, home improvement, and other purposes
Read full reviewOverview
Avant personal loans are a good choice for borrowers with bad credit looking for small- to moderate-sized personal loans. Loans are available up to $35,000 and you could get the money as soon as the next business day after approval. Plus, Avant is more likely than some lenders to approve the applications of borrowers who've prequalified with Avant. However, the lender charges an origination fee up to 9.99%, and its top-range interest rates are among the highest of the lenders we reviewed.
Fees
Origination fee, late fee, dishonored payment fee
Eligibility
Available in all states except HI, IA, MA, ME, NY, VT, and WV
Time to get funds
As soon as the next business day (if approved by 4:30 p.m. CT on a weekday)
Loan uses
Debt consolidation, emergency expense, life event, home improvement, and other purposes
Repayment terms
1 to 5 years (2 to 5 years through Credible)
Read full reviewOverview
It’s worth considering a personal loan through Splash if you have good credit (ideally, a FICO score above 700). The platform offers loans from a wide range of lenders, and next-day funding is available. Plus, Splash has a live chat feature so you can get real-time answers without having to wait on hold or for an email. Loans are available up to $100,000 if you apply via Splash’s website.
Rates are competitive, but borrowers with excellent credit may find lower APRs elsewhere. If you need a repayment term longer than five years, you’ll need to look elsewhere as well.
Loan amount
$5,000 - $100,000 (up to $35,000 on Credible)
Eligibility
Available in all states except VT. OH and NM net disbursed amount must be greater than $5,000. MA must be greater than $6,000
Time to get funds
Same day available, typically 1-3 days
Loan uses
Debt consolidation, home improvement, medical expenses, major purchases
Read full reviewOverview
Universal Credit is one of a handful of lenders that offers personal loans for bad credit. If your FICO credit score is at least 560, you may be eligible for a Universal Credit personal loan. It offers loan amounts up to $50,000, repayment terms up to seven years, and discounts for direct pay and autopay. Funds are available as soon as the next business day after loan approval.
Note that rates and fees can be relatively high — you may pay an origination fee from 5.25% to 9.99%, and APRs start at 11.69%. If you get a loan with a high interest rate, consider refinancing your personal loan at a lower rate once you've improved your credit score.
Eligibility
A U.S. citizen or permanent resident; not available in DC, IA, SC, WV
Time to get funds
As soon as 1 business day after acceptance
Loan uses
Debt consolidation, pay off credit cards, home improvements, unexpected expenses, home and auto repairs, weddings, and other major purchases
Read full reviewOverview
Happy Money has been in operation since 2009 (formerly known as Payoff). It's an option for fair-credit borrowers (plus those with better credit), and notably has a relatively low top-end APR. In other words, you could qualify for a lower rate with Happy Money with fair credit, relative to other lenders that offer fair-credit loans. The company does charge an origination fee on some loans, up to 5%, but that's not as high as some other lenders' origination fees.
You should be prepared to wait a few days to get your money, as funding can take three to five days once approved. And loans aren't available in Massachusetts or Nevada. Happy Money has an A+ rating with the BBB and is ideal for debt consolidation and credit card consolidation loans.
Eligibility
Available in all states except MA, MS, NV, and OH
Time to get funds
As soon as 2 - 5 business days after verification
Loan uses
Debt consolidation and credit card consolidation only
Read full reviewOverview
BHG Money stands out for offering the largest loan amounts — up to $200,000 — of any Credible partner lenders. Simply put, if you need an unsecured personal loan over $100,000, there are very few places to look, but BHG is one. You'll have up to 10 years to repay the loan, but you'll need an annual income of at least $100,000 to qualify and a FICO score that's 660 or higher. However, if you have a cosigner that meets these requirements, BHG will consider your application.
Loan amounts start at $20,000, so look elsewhere for small loans. And BHG charges a modest origination fee between 2% and 4%, depending on your financial profile. Loan funds are available within three to 14 days of loan approval. Note that you can't prequalify with BHG.
Fees
Origination fees, late fees
Eligibility
Available in all states except Maryland and Illinois
Loan uses
Debt consolidation, baby (adoption), engagement ring financing, moving (relocation), business, home improvement, special occasion, cosmetic procedures, major purchase, taxes, credit card refinancing, medical expenses, vacation, wedding, other
Read full reviewFees
Origination Fee, $15 Late Fee, $25 NSF Fee
Eligibility
Available in all states except CO, CT, ME, NV, NH, TN, VT, WV, WY, and all U.S. Territories
Time to get funds
Funds typically deposited into your account in 1 business day13
Loan uses
Debt consolidation, credit card refinancing
Read full reviewOverview
OneMain Financial has multiple options for bad-credit personal loans. There is no minimum credit score required (if you apply directly with OneMain), which means you could get a loan with bad credit (FICO below 580). Plus, cosigners are allowed — a cosigner is someone (ideally, with good credit) who promises to repay the loan if you can't, which can make it easier to qualify or lower your rate. And, secured personal loans are available. You secure a loan with collateral, which may also help you qualify or lower your rate.
Rates are higher than competitors and OneMain charges origination fees as either a flat fee up to $500, or a percentage from 1% to 10% (depending on your state of residence). Note that even if you prequalify for a personal loan with OneMain, getting approved isn't a given.
Fees
Origination fee, unsuccessful payment fee, late fee
Eligibility
Must have photo I.D. issued by U.S. federal, state or local government
Time to get funds
As soon as 1 to 2 days after acceptance
Loan use
All except business, and education
Read full reviewTypes of collateral loans
Collateral loans are very common in the U.S. and come in various forms. Here are some of the popular types you can find on the market:
- Secured personal loans: A secured personal loan is a term loan that requires some type of collateral and allows you to use the funds however you choose.
- Secured credit cards: A secured credit card requires you to make a deposit to gain access to a credit line. The deposit then acts as collateral for the credit line, and you can use the funds however you’d like.
- Mortgages: A mortgage is a secured term loan that you can use to buy a home. The home then acts as collateral for the loan.
- Home equity loans: A home equity loan, also known as a second mortgage, is a term loan secured by the equity you have in your home. You can use the loan’s funds however you’d like.
- Auto loans: Auto loans, or car loans, are secured term loans you use to purchase vehicles. The vehicle then acts as collateral for the loan.
- Car title loans: A car title loan is a term loan secured by a vehicle that’s owned outright. You can use the loan funds however you choose.
- Life insurance loans: Permanent life insurance policies often acquire cash value over time. Many insurance providers then allow you to take out loans secured by your cash value account.
- 401(k) loans: 401(k) retirement account providers often allow you to take out loans secured by your account balance, which you can then use however you choose.
- Secured business loans: Business loan lenders may require various types of collateral for secured business loans, including invoices, future sales, equipment, inventory, or machinery.
In many cases, you can get pre-approved for a loan before your collateral is inspected and appraised. If you’re looking to get a mortgage, for example, you can get pre-approved for a loan amount before you find the property you want to buy. However, the application and approval process can vary by lender and loan type, so it's best to check with potential lenders to find out how they work.
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Keep Reading: How to Apply for a Personal Loan
Alternatives to collateral loans
Not too keen on collateral loans? You can also look into going the collateral-free route.
Lenders offer unsecured loans in many forms, including personal loans, credit cards, and business loans. Without any collateral to consider, approval is primarily based on your credit scores, credit history, and income. The main upsides are fast approvals and great offers if you have good-to-excellent credit. The potential downsides are stricter eligibility requirements, and potentially lower loan amounts, higher rates, and shorter terms.
Another important factor to consider about unsecured loans is that the lender won’t have the right to seize your property if you default. Instead, they typically sell bad debts to collection agencies that pursue you for the balance. However, lenders can also sue you. If they win, the court may allow them to then seize your assets to recoup their losses.
Good to know: You can also consider adding a cosigner on an unsecured loan, if a lender allows it. A cosigner takes on the responsibility of making payments if you default or are unable to pay. Keep in mind that their credit will be affected.
FAQ
What are the requirements to qualify for a collateral loan?
The requirements to qualify for a collateral loan vary by lender and loan type. However, you’ll typically need to meet the lender’s income, debt-to-income ratio (DTI), and credit score minimums, and provide proof of income, identity, and residence. Additionally, you’ll often need to provide documentation for your collateral and may need proof of insurance.
Can I use any type of asset as collateral?
The type of asset you can use as collateral for a loan varies by lender and loan type. Certain loan types, like mortgages and auto loans, for example, are secured by the asset that you purchase with the loan. However, lenders that offer other loan types — like secured personal loans, pawn shop loans, and business loans — may accept various asset types.
How does the value of my collateral affect the loan amount?
Lenders assess the value of your collateral to determine the loan amount you can get. In most cases, they’ll only offer you a percentage of the total value to ensure their interests are protected. For example, you can only borrow up to 80% of a home’s value with a conventional mortgage without needing mortgage insurance, according to Freddie Mac. The percentage that you can borrow will vary by lender and loan type.
What happens if I default on a collateral loan?
If you default on a collateral loan, the lender can seize and sell the asset that’s securing the loan to recover their losses. For example, if you put down a deposit on a secured credit card, the credit card issuer could apply the deposit to your outstanding balance. In the case of a car loan, the lender can repossess your vehicle and sell it. In the case of a mortgage, your home can go into foreclosure.
Can I get a collateral loan with bad credit?
You may be able to get a collateral loan with bad credit, as the collateral helps to reduce the risk a lender faces in issuing loans. If you default, the lender can seize the asset, sell it, and recoup its costs. However, borrower requirements vary between lenders and loan types. Your best bet is to research the eligibility requirements of lenders offering the loan type you want to find those that work with bad credit borrowers.
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Credible Staff
Credible Staff. The goal of the Credible editorial writers and staff is to help our readers get up to speed on issues surrounding student loans, mortgage, and personal finance, so you can make informed decisions. We’re here to help you stay on top of the latest news, trends, concepts, and changes in policy and regulations.