What Are Collateral Loans?

The right personal loan can give you quick access to funds to cover a variety of expenses.

Certain types of loans require you to provide collateral — or a valuable asset — as a pledge to repay. If you have bad credit or an unestablished credit history, applying for a personal loan with collateral can improve your approval odds and possibly help you secure better interest rates.

Collateral loan definition

A collateral loan is a type of secured personal loan that is backed by collateral. They are available at many banks, credit unions, and from online lenders. If you take out a personal loan with collateral, you'll need to offer the lender an asset as reassurance you'll make your monthly payments and repay the loan in full as agreed.

What is collateral?

Collateral is an item of value that you can use to secure financing. It serves as an assurance that you'll repay the debt.

Common types of collateral include your car title, house deed or other real estate, jewelry, or even a cash deposit. The type of collateral you need will depend on the type of loan and lender you choose.

Why do secured personal loans require collateral?

Secured personal loans with collateral reduce the lender’s risk. Lenders know if a borrower fails to repay the amount owed, they have the right to seize the collateral to recover some (or all) of the costs. This guarantee can allow lenders to offer more favorable loan terms compared to unsecured loans.

Types of collateral for loans

Depending on the type of secured personal loan you choose, there are different types of collateral you may need to provide before approval.

Typically, the value of the collateral should be equal to or greater than the amount borrowed. Most approved loan amounts are somewhere between 50% to 80% of the collateral's appraised value. Common types of collateral include:

• Your house or other real estate
• Your vehicle
• Cash in your savings account
• Certificates of deposit (CD)
• Investments, including stocks and bonds
• Insurance policies
• Jewelry
• Fine art
• Antiques
• Precious metals

Types of collateral loans

Title loan

A car title loan is a secured loan that uses your vehicle as collateral. With this loan, you’ll give the lender your title in exchange for a lump sum of money. The amount you receive is typically 25% to 50% of your vehicle’s value. Best of all, you can continue to drive your car while you pay back a title loan.

Pawn shop loan

If you have a diamond ring, artwork, or other collectible that isn’t accepted at most lenders, you may be able to take it to a pawn shop and walk out with money in minutes.

Since pawn shop loans don’t involve a long application process or credit check, they provide a quick way to borrow money when you’re in a pinch. Your loan amount will be based on the value of the item you choose to pawn, and you can recover the item if you repay the loan plus any interest and fees. Otherwise, the pawn shop keeps your item and resells it.

Mortgage

A mortgage is a loan used to finance the purchase of a home.

When you take out a mortgage, you promise to repay the money you’ve borrowed plus interest over an agreed-upon term that is usually 15 or 30 years. The home you finance serves as the collateral, so if you default, the lender can foreclose on your property.

Home equity line of credit (HELOC)

With a HELOC, you can leverage your home’s equity (the difference between what you owe on your mortgage and what your home is currently worth) to meet your financial goals. It’s a flexible financial tool that allows homeowners to borrow as much or as little as they need up to a set limit.

The downside? HELOCs often come with variable interest rates, meaning the interest rate can fluctuate based on market conditions. If you can’t afford to repay the amount you borrow from your HELOC, the lender can repossess your house through foreclosure.

Auto loan

Most people take out an auto loan when they purchase a new or preowned vehicle. These loans are similar to title loans in that the vehicle you're financing is the collateral, so the lender will hold your title until you've repaid the debt in full.

Secured credit cards

Opening a secured credit card can be a smart option for anyone working to rebuild or establish credit. Unlike traditional credit cards, a secured credit card requires you to put down a cash deposit as collateral. This deposit serves as security for the lender and reduces the risk associated with lending money to borrowers with limited or poor credit histories.

Pros and cons of getting a personal loan with collateral

Collateral loans are easier to get if you don’t have a great credit score because there is less risk for the lender, so you’re likely to get more favorable terms and better rates compared to an unsecured loan. Depending on whether the lender reports to the credit bureaus, you may be able to use them to improve or build credit.

But just like all financial products, collateral loans do have a few drawbacks. You can expect a longer application process that involves having your collateral item appraised, either by the lender or a third-party appraiser. What’s more, you run the risk of losing an asset if you fail to make your payments.

Pros

• Most lenders don't require good credit.
• Rates are typically lower than unsecured loans, especially if you have a poor credit rating.
• Depending on the value of your collateral item, you can usually take out a larger loan amount than you can with an unsecured loan.

Cons

• Longer application process
• Must own the collateral item free and clear (without any existing loans or liens).
• Risk losing a valuable personal asset if you default on the loan.

How to qualify for collateral loans

Requirements for a personal loan with collateral will vary by lender, but in general, you’ll need:

• The asset you’re using as collateral
• Proof of your identity, such as a driver’s license, passport, birth certificate, or Social Security card
• Employer and income verification, such as pay stubs, tax returns, and bank statements
• Proof of address, like a utility bill, lease agreement, or mortgage statement

Collateral loan FAQs

Is a personal loan with collateral better than an unsecured loan?

The important question to ask is which type of loan is best for your unique financial situation. If you’re a borrower with bad credit, some lenders like Advance America may approve you for either kind of loan. But if you have a bankruptcy or foreclosure on your credit report, your options may be limited to personal loans with collateral.

Can I get a collateral loan without a credit check?

Every lender has their own loan approval requirements, and that may or may not involve credit checks. If you’re worried about your credit history, you might compare lenders to find one with lenient credit requirements that can increase your chances for loan approval.

At Advance America, we base approval decisions on your employment history, income, and current debts rather than running a credit check.

Is a personal loan with collateral worth it?

A secured collateral loan may provide a larger loan amount, lower interest rate, or better repayment terms than you might receive with an unsecured loan. As with any type of financing, you should consider your options and decide whether you’re comfortable risking an asset.