Key takeaways:
- Collateral is an asset that you offer when applying for a loan, which the lender can seize and sell if you fail to make payments on the loan.
- Personal loans are typically unsecured loans that do not require collateral, but some lenders may request it, especially if you have bad credit or want to borrow a large sum of money.
- Any asset can potentially be used as collateral for a personal loan, including real estate, vehicles, savings accounts, investments, and valuables. However, it’s important to have enough equity in your assets to justify using them as collateral.
Collateral refers to an asset that you offer when applying for a loan. The idea is that if you stop making payments on the loan, the lender can seize the collateral and sell it to prevent excessive losses.
Some loans almost always require collateral. For example, a mortgage is typically collateralized by the home it is used to buy. When you get an auto loan, the lender has the right to repossess your car if you stop making payments. Loans that require collateral are known as secured loans, while loans that don’t are referred to as unsecured loans.
Do you need collateral for a personal loan?
Most personal loans are unsecured loans, meaning that they do not require any collateral. With an unsecured loan, if you stop making your payments and default on the loan, the lender can send your account to a collection agency, report the default to the credit bureaus, and take other steps to attempt to collect the debt. But they can’t take any of your assets.
On the other hand, some personal lenders may request collateral before they’ll approve your loan application. This is known as a secured loan. If you have bad credit, or a limited credit history, it can cause a lender to ask for collateral. It is also not uncommon for lenders to request collateral with loans for particularly large balances, or if you have an abundance of unsecured debts already.
What can be used as collateral for a personal loan?
Any asset you own can potentially be used as collateral for a personal loan. In practice, however, lenders tend to have their own requirements. Plus, the collateral required can depend on your personal credit situation as well as the size of the loan. In other words, you likely won’t be asked to pledge your home as collateral for a $1,000 loan, but you might be asked for some other asset to secure the loan.
Some lenders want you to have a certain amount of money in a savings account or CD to pledge for collateral. Others will only make secured personal loans that have a car title pledged as collateral. And some lenders will accept a broad range of assets as collateral.
Just to name some of the most common examples, these are some types of assets that can potentially be used as collateral for a personal loan:
- Real estate
- Vehicles you own
- Savings account
- Money market or certificate of deposit (CD) accounts
- Investments, such as stocks and bonds in an investment account
- Fine art and collectibles
- Jewelry, or other valuables
It’s also worth mentioning that you typically need to have enough equity in your assets to justify using them as collateral. For example, if your car is worth $20,000 and you still owe $19,000 on it, it’s unlikely that a lender will accept it as collateral for a large loan.
What if you don’t have enough collateral for a personal loan?
If you don’t have enough assets to pledge, or if you don’t have the particular type of assets a secured personal loan originator requires, there are some potential alternatives.
First, you still may be able to qualify for an unsecured loan even if your credit history isn’t lengthy or excellent. Upstart is one such company that looks beyond your credit score for unsecured personal loans, using over 1,000 data points to evaluate potential borrowers.
Another alternative is if you own certain assets, you may be able to borrow against them without using a personal loan. For example, many lenders won’t allow personal loans to be collateralized with real estate, but you could look into a home equity loan or home equity line of credit (HELOC) instead.
There are several other options that might be available, depending on your situation. If you have a 401(k) or similar retirement account at work, you may be able to borrow money from your account, and then pay yourself back (with interest). This usually shouldn’t be the first choice, but can be a
The bottom line on collateral for personal loans
If you have collateral to offer, it can make it easier to qualify for a personal loan. Most lenders don’t require collateral for personal loan borrowers, but it is still important to realize that defaulting on an unsecured loan obligation can lead to significant financial consequences, including (but not limited to) a lower credit score, lawsuits, and wage garnishments.
All other factors being equal, an unsecured loan is preferable to a secured one because the things you own are more protected if you become unable to make your payments. However, whether a lender requires collateral or not is just one of the many factors to take into consideration when shopping around for a personal loan.
