Taking out a personal loan is one way to get extra funds. Personal loan flexibility makes the option attractive to most borrowers — you can use the loan for various things. These can include debt consolidation, medical bills payment and significant purchases.
Although most personal loan lenders require no collateral, others do, especially if your credit score is less than satisfactory or you have little to no credit history.
Having collateral lowers the risk for a lender, which encourages them to lend you money. However, you'll lose your asset if you default on your loan.
MoneyGeek explores how you can use collateral for a personal loan, when you need it, and what assets you can use.
Key Takeaways
Collateral is an asset you put up to back a personal loan. Most borrowers use their homes, cars or bank accounts.
Unsecured personal loans need no collateral, but secured loans do.
The lender will keep your collateral if you default on your loan to offset its loss.
What Is Collateral?
If you’re wondering whether or not you need collateral for a personal loan, it's best to understand what it is first.
In its simplest definition, collateral is any asset you can use to back your loan. It makes qualifying easier because it increases the lender's comfort level to lend you funds and decreases its risk.
Collateral acts as an incentive for you to live up to your financial obligation. If you default on your personal loan, your lender gets to keep your asset. For example, if you use your home as collateral, you stand to lose it if you can't repay your loan.
However, putting up collateral when taking out a personal loan has several benefits. Lenders are more likely to offer you lower interest rates and longer repayment terms.
Loan amounts for personal loans with collateral are usually higher, but it also depends on your asset's value. The higher the value, the more lenders may be willing to lend. That's why most borrowers use high-value items, such as homes, vehicles or investment accounts, as collateral.
Do All Personal Loans Need Collateral?
If you're wondering if you need collateral for a personal loan, the answer is: sometimes.
There are different kinds of personal loans — some are secured, and others are unsecured. Whether or not you must have collateral depends on which type you get. A secured loan requires collateral, while an unsecured loan does not.
Secured Personal Loans
As of the third quarter of 2021, the total personal loan debt in the U.S. was $436.18 billion. Almost 70% of this (or $303.01 billion) was from secured personal loans, which require collateral.
Lenders still check your source of income and credit score when you apply for a secured personal loan. The process also tends to be longer since they'll need to assess the value of your collateral. However, they're more likely to approve your application.
Unsecured Personal Loans
There's no collateral requirement for most personal loans, making them unsecured. Unsecured loans put lenders at higher risk should you default on your loan. Although having good to excellent credit scores and a verifiable source of income helps in your application, lenders tend to charge higher interest rates for unsecured loans. You might also get a lower loan amount.
Because there's no collateral, lenders don't need to perform a value assessment. This makes the application process quicker but not necessarily easier. Lenders need assurance that you're capable of paying your loan. They might impose a minimum credit score or debt-to-income ratio requirement.
Secured and Unsecured Personal Loan Comparison
Secured Personal Loans | Unsecured Personal Loans | |
|---|---|---|
Collateral Requirement | Secured personal loans | Unsecured personal loans |
Interest Rates | Secured personal loans | Unsecured loans usually get |
Loan Amount | You may get a higher loan | Your loan amount depends |
Purpose/Uses | Restrictions on funds usage | Some lenders restrict how |
Application Process | You'll face fewer qualifiers for | Unsecured personal loans |
What Can Be Used as Collateral?
Most borrowers use real estate or a car as collateral for a personal loan, but your options aren't limited to these. Other assets you can use for a secured personal loan include:
Your house (or other real estate) is a popular choice for collateral. The higher your home’s value, the more likely lenders will offer lower interest rates.
Lenders look at your home equity when assessing it, so if you've paid off your mortgage, it puts you in a good position to borrow a significant amount. You can still use your house as collateral even if you're paying for your mortgage. However, you must ensure you have enough equity to back the loan.
Another popular option for collateral is a vehicle — and it isn't limited to your car. You can use boats and trucks, too. Although you may lose your property if you can't repay your loan, it's typically a better option than going for short-term loans, like a payday loan, a type of personal loan you’d want to avoid.
It's also best to check a lender's requirements for collateral. Some won't allow you to use older cars (those more than five or seven years old) due to depreciation.
Collateral doesn't always need to be a physical asset (although it usually is). For example, if you have an investment portfolio, you can use it to back a secured personal loan.
However, don't expect your loan amount to be the same as your portfolio's worth. Usually, your loan will come up to around 60% to 70% of your investment portfolio's value.
You can also use your savings account or a certificate of deposit, but you can't get more than it contains. Another thing to consider is you might not be able to access your funds if you use them as collateral, so you must be comfortable with that.
If you're strapped for cash and are considering selling your jewelry to get funds, using it as collateral for a personal loan may be a better option.
Financial institutions will typically accept necklaces, rings (particularly engagement rings), earrings and necklaces. Some lenders might ask you for proof of ownership, such as receipts.
It's also best to have a jeweler appraise your items before offering them as collateral. This way, you'll know their worth and if the loan amount is worth considering. As with other assets, the more valuable the collateral is, the lower your interest rates and the higher your loan amount.
You can also use insurance policies as collateral. Most lenders will accept permanent life insurance policies, whether whole or universal life. Their cash value component is the primary reason — you can typically borrow up to 90% of the amount.
Term life policies aren't as attractive because they don't earn cash value. Additionally, your loan becomes unsecured once the policy expires, increasing your lender's risk.
Collateral assignment of life insurance makes your lender your primary beneficiary. If you can't pay your debt, your lender can surrender your policy and get its surrender value. Alternatively, they can wait until you die and collect your death benefit.
Besides jewelry, you can also use precious metals to get a secured personal loan. Lenders will usually accept gold, silver and platinum.
Precious metals come in many forms. Although you mostly find them in jewelry, you can also find them elsewhere. Some precious metals come in the form of bullion, bars or coins.
Precious gems are another option for collateral. You can use diamonds, emeralds and sapphires, among others.
Many people build a collection over time. And it could back the funds you need without having to part with your treasures. A prime example is an art collection — you can use it and, depending on the value of your pieces, get a sizable loan amount. The same goes for rare coins, vintage watches or Faberge eggs.
However, it's best to talk to your lender because some only accept specific items or brands. You'll need to know this before proceeding with your loan application.
Frequently Asked Questions About Collateral for Personal Loans
If you aren't certain whether you need collateral for your personal loan (or whether a secured loan is the right choice), you can get additional information from these frequently asked questions.
The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.
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