What is a collateral loan? How to get a secured personal loan.

Personal loans generally fall into two categories: secured and unsecured. In both cases, lenders typically review your credit history before making a decision. However, if your credit isn’t strong, you may have better odds of qualifying for a secured loan. That’s because these loans are backed by collateral — a valuable asset you own that reduces the lender’s risk.

Here’s what to know about collateral loans, common forms of collateral, and how to qualify for a secured personal loan.

This embedded content is not available in your region.

What is a collateral loan?

A secured or collateral loan is a debt that’s backed by an asset. Lenders consider these loans to be a lower risk because they can seize your collateral if you fail to make your payments. For this reason, collateral loans are often easier to qualify for than unsecured, or non-collateral, loans. Secured loans also typically have more favorable terms, such as lower interest rates, since they are less risky for the lender.

What serves as loan collateral?

You’re probably already familiar with common forms of loan collateral, especially if you’ve ever applied for an auto loan or mortgage — which are backed by your car and home, respectively.

These are some common and less common forms of loan collateral:

Car
Boat
Motorcycle
Recreational vehicle
Savings account
Certificate of deposit (CD) account
Investments, such as stocks or bonds
Jewelry
Life insurance policies

To pledge collateral for a secured personal loan, you generally need to own the item outright. That means if you’re still paying off your car, for example, you likely can’t use it to secure a personal loan.

Pros and cons of collateral loans

While you might have an easier time qualifying for a collateral loan, these loans aren’t without their risks. Here’s an at-a-glance comparison.

Benefits

Easier approval: Because your loan is backed by something of value, it may be easier to get approved. Unsecured loans are generally issued based on your credit and financial history, and thus, could be harder to qualify for if you’ve had past credit missteps.
Lower rates: You could end up with a lower rate on a secured loan than you would with an unsecured loan. Again, that’s because the risk for the lender is reduced due to the collateral.
Larger loan: A larger loan amount may also be a possibility because of your collateral.

Risks

Lender can seize your asset: The biggest risk of a collateral loan is that your lender can seize the asset backing your loan if you fail to make your payments. Ensure that your payments fit into your budget if you plan to apply for a collateral loan.
Longer application process: Depending on the type of secured loan you’re seeking, the approval process could be longer and more complicated. For example, a lender might require an appraisal as part of its decision process.
Fewer options: While some secured loans, such as auto or home loans, are common, some are harder to find. For instance, not every institution offers a secured personal loan, so you may have to do some research to find a lender to work with.

Up Next

How to get a secured personal loan

Unsecured personal loans are more widely available than secured personal loans. That said, many lenders, including Upgrade and KeyBank, offer secured options. Borrower requirements, including income and credit score requirements, differ by lender.

But generally, the application and approval process for a secured personal loan is as follows:

Compare loan options: Search for loans with different lenders, compare rates and loan amounts, and decide on your best option.
Gather your documentation: Expect to provide personal and financial information as part of the application process. Your lender will likely request copies of a government-issued ID like a driver’s license, W-2s, tax returns, pay stubs, bank statements, or other documentation.
Complete an application: After gathering your documents, it’s time to apply for a loan. Most lenders offer online applications, simplifying the process. You’ll need to share your personal and financial information and submit everything once your application is complete.
Follow up with any additional paperwork: Your lender might request additional documentation after reviewing your initial application. Watch for email or phone requests, and submit additional paperwork quickly to keep the process on track.
Await approval: Approval timeframes differ by lender, though many offer approval in just a couple of business days.