What Can Be Used As Collateral for a Personal Loan?

Most personal loans are unsecured, meaning they don’t require any collateral. The only assurances the lender has that you’ll repay the loan are your credit history and your word. But unsecured personal loans aren’t the only option.

A secured personal loan requires collateral, such as your home or other asset, to secure it. Personal loans with collateral have some key benefits, including lower annual percentage rates (APRs) and more lenient qualification requirements, which can help you get a loan with bad credit. But if you default on a secured loan, you risk of losing the collateral.

Compare rates on secured loans

What is collateral?

Collateral refers to an asset that secures a loan. If you fail to repay the loan, the lender can claim the collateral.

Collateral can be either physical or financial. For example, some secured loans have physical assets, such as your home or vehicle, serving as collateral. Others, including some secured personal loans, use financial assets, such as money in a certain bank account.

Perhaps the most common example of collateral is your home when you take out a mortgage. You still own the home, but your lender places a lien on it. If you fail to make your mortgage payments, the lender can foreclose on your home to collect what you owe.

Learn More: What Are Collateral Loans?

Types of collateral used for a personal loan

There are many different assets that can be used as collateral for a personal loan, including:

• Your home
• Your vehicle
• Investment accounts
• Certificates of deposit (CDs)
• Collectibles

For example, Upgrade allows you to use your vehicle as collateral for a personal loan. Meanwhile, Best Egg offers a less common secured loan, where you can use your home’s fixtures (cabinets, vanities, light fixtures, and more) rather than the home itself as collateral.

You may also use financial assets, such as savings or investments, to secure a personal loan. If you have a savings account or certificate of deposit with a particular lender, you may be able to get a personal loan up to 100% of your account balance, as that account will secure the loan.

Check Out: Secured vs. Unsecured Personal Loans

Pros and cons of using collateral for a personal loan

Using collateral to secure a personal loan can offer plenty of benefits, such as improving your loan eligibility and APR. However, consider the downsides of a secured loan before applying for one.

Pros:

• Easier to qualify: When you apply for a personal loan with collateral, the lender doesn’t have to rely solely on your credit profile. So you may have an easier time qualifying.
• Lower APR: Thanks to the collateral securing them, secured personal loans often have lower APRs than unsecured ones.
• Higher loan limits: If you have good credit, you may be able to get a secured personal loan as high as $100,000.

Cons:

• Fewer lender options: Most personal loan lenders don’t offer secured loans. As a result, you’ll be limited to a smaller list of potential lenders than if you were applying for an unsecured loan.
• Assets at risk: Collateral is intended to secure your loan. If you fail to make your loan payments, your loan agreement allows your lender to seize your collateral. In other words, if you hit financial trouble, you could lose an important asset.
• Longer approval times, possible fees: A secured loan adds a step to the loan approval process, since the lender will need to appraise the value of the collateral. Also, if you use your home as collateral, you typically have to pay a home appraisal fee.

See Also: How To Get a Low-Interest Loan

Applying for a personal loan with collateral

Here’s a step-by-step guide to apply:

1. Assess your loan eligibility: Before applying for any loan, check your credit and determine your overall eligibility. If you have good credit, you may be able to choose between a secured loan and an unsecured loan.
2. Decide what you’ll use as collateral: If you plan to get a secured loan, decide what you’ll use as collateral. Certain lenders may require specific types of collateral, such as your house or car. Choose wisely, knowing that if you can’t repay your loan, you could lose the asset.
3. Shop around for loans: You’ll have fewer lender options when applying for a secured loan, but there are still several lenders to choose from. Shop around to identify those that best align with what you need.
4. Prequalify (if possible): Many personal loan lenders allow you to prequalify, which won’t affect your credit score. If the lenders you’re considering allow it, prequalify before choosing a lender. Just remember that when you prequalify it’s not an offer of credit, and your final rate may be different.
5. Apply for your loan: Once you’ve chosen a lender, you can move on to the formal application. You’ll have to provide information about your personal finances, as well as information about your collateral. At this stage the lender will conduct a hard credit check, which will bring your score down a few points temporarily.
6. Get your loan funds: Depending on your lender, you may receive your loan funds as quickly as the same business day, while other lenders may take closer to a week.
7. Repay your personal loan: It’s always important to repay the money you borrow, but it’s especially important with a secured loan. If you stop making your payments, you could lose the collateral you’ve pledged.

Secured personal loan lenders

As noted, few lenders offer secured personal loans. Here are Credible partner lenders that do. 

Alternatives to using collateral for a personal loan

The best alternative to using collateral for a personal loan is generally to get an unsecured loan, which doesn’t require collateral. However, if your credit makes that challenging, you still have some other options.

• Loan with a cosigner: If you can’t qualify for an unsecured personal loan on your own, consider applying with a co-borrower or cosigner. A co-borrower has equal access to the funds and payment responsibility, while a cosigner is only responsible for making payments if you miss payments. That person would be added to your loan application, and their credit history would be considered when determining your loan eligibility. If they have better credit than you, it could improve your chances of approval.
• Credit card: You can often get a credit card with a 0% introductory APR, depending on your credit score. This means you won’t accrue any interest on purchases made with the card during the introductory period. However, the card's regular APR goes into effect when the introductory period ends. To avoid interest, you'll need to pay off the balance before the 0% APR offer expires.
• 401(k) loan: If you have a 401(k) through your job, you may be able to borrow against your account balance. The benefit of this type of loan for someone with bad credit is that there’s no credit check required. As long as your employer allows 401(k) loans, you can qualify without a credit check.
• Cash advance apps: If you only need a small loan amount, cash advance apps, like Chime or EarnIn, allow you to borrow from your next paycheck. Instead of an APR, these apps typically charge fees, ranging from subscription fees to optional tips.

Related: Personal Loan vs. 0% APR Credit Card