The only time you’d need collateral for a personal loan is if it’s a secured personal loan. Unsecured personal loans — which is what most personal loans are — are only secured by a borrower’s promise to repay the funds, rather than collateral.
But if you do opt for a secured personal loan, whether due to potential for larger loan amounts or more competitive terms, you’ll need an item to put up as collateral. Collateral can include a house, car, boat, and so forth — really, whatever a lender is willing to hold. You may also be able to use investment accounts, cash accounts, or certificates of deposit (CDs) as collateral to get the cash you need.
Secured Loans: Personal Loans With Collateral
Requiring collateral for a personal loan is uncommon, but not unheard of, depending on the type of personal loan you get. Generally, secured loans have more competitive interest rates, larger loan amounts, and more favorable terms.
But if a borrower fails to repay their secured loan, they’ll receive a notice letting them know they’re in default and giving them an opportunity to become current on payments. If the borrower doesn’t pay up, that can lead to loss of the collateral.
There’s a wide range of possibilities when it comes to types of collateral that can be used to secure a personal loan. Some common examples of loan collateral include:
• Real estate: One option for personal loan collateral is your home or other real estate you own, like an investment property. Even if you don’t fully own your home, you may be able to use the equity you do have as collateral. Just make sure you understand the risk involved — you could lose your home if you’re unable to make payments.
• Vehicle: You can use a vehicle as collateral when purchasing a car or truck, but some lenders allow you to use the equity in a vehicle to get funds. This may be a better choice than, say, a payday loan. However, you risk losing that vehicle if you can’t make the payments.
• Bank or investment accounts: You might be able to use a CD or other investment account as collateral. Just know that using these accounts as collateral might prevent you from accessing the funds in the accounts, which is a downside to consider.
Beyond these more standard items, other things that could be used as collateral for a secured personal loan include paychecks, savings accounts, paper investments, fine art, jewelry, collectibles, and more.
Potential Advantages of Secured Loans
If you need to borrow a larger sum of cash, then you might find more success if you put up collateral. A borrower whose credit score isn’t as high as might be required for a riskier unsecured personal loan may find it easier to get approved for a personal loan that’s secured.
Plus, you might receive more favorable rates and/or terms, because the lender has the security of knowing they can possess the collateral if the loan is not paid back. As a personal loan calculator can demonstrate, a lower interest rate can add up to savings quickly.
Downsides of Secured Personal Loans
Perhaps the biggest downside of secured personal loans is that if you fail to make your payments, you could lose the asset that’s securing the loan. Given that houses, investment accounts, and vehicles are common examples of personal loan collateral, that could be a big blow.
Another downside of secured vs. unsecured personal loans is that the application process is generally longer and more involved. This is because the lender needs to assess the asset being put up as loan collateral to verify its value.
Unsecured Personal Loans
As mentioned, unsecured personal loans aren’t backed by collateral. Instead, lenders just need a borrower’s signature promising they’ll pay back funds (as well as a review of their credit history and other financial fitness indicators, of course). Because of this, you may hear unsecured personal loans referred to as signature loans, good faith loans, or character loans.
Student loans are a type of unsecured loan, though they have their own unique terms and repayment options. So are most credit cards, although they tend to have higher rates than what’s typical on an unsecured personal loan.
Potential Advantages of Unsecured Loans
You can typically obtain unsecured personal loans on short notice. If the borrower has sufficient income and a good credit score and history (among other factors), rates can be competitive compared to those of secured loans.
And, of course, with an unsecured personal loan, you wouldn’t be tying up any assets or putting them at risk if you struggle with repayment.
Downsides of Unsecured Loans
Because unsecured loans are riskier for the lender, rates are typically higher than those of secured loans. Additionally, amounts available to borrow are usually smaller.
While it’s true that there isn’t an asset a lender can repossess for nonpayment, lenders can still take action on unpaid unsecured personal loans. Lenders can report the account as in default to the credit bureaus, send the account to collections, and take a borrower to court for nonpayment. This can significantly affect a person’s credit for years to come.
Building or Repairing Credit to Avoid Loan Collateral
If your credit score or credit history is preventing you from getting an unsecured loan, it might make sense to take time to build or repair your credit. This won’t happen instantly, so it won’t be the magic solution if you need a loan now. But if you’d prefer not to put up an asset as collateral, it might be a worthwhile step prior to taking out a personal loan.
Some steps you can take to build or repair your credit include:
• Pay all existing loans on time, and make sure not to miss any.
• Get your monthly bills, such as your rent payments or utility bills, added to your credit report by a third-party service.
• Keep your credit utilization (meaning the total percentage of your available credit you’re using) below 30%.
• Get caught up on any outstanding balances or past-due debts.
• Limit applications for new accounts.
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Making a Choice: Secured or Unsecured
Whether a secured or unsecured personal loan is right for you depends on your specific need, financial situation, and credit history, among other factors, though the common uses for personal loans apply to both.
If you’re looking for higher borrowing limits and potentially lower rates, or if you know you may not have as strong of an application, an unsecured personal loan could make more sense. Just think carefully about what asset you decide to put down as collateral, as you do need collateral for a loan of this type.
But if you have strong credit and don’t need to borrow as much money, an unsecured personal loan might make sense. That way, you won’t have to worry about loan collateral. Just remember that doesn’t mean you’re off the hook if you don’t repay the loan — lenders can report the defaulted loan, put it in collections, and even take you to court.
Unsecured Personal Loans at SoFi
If you think an unsecured personal loan is the right choice for you, consider a personal loan from SoFi. Because it is an unsecured loan, you won’t need to worry about loan collateral. Plus, SoFi personal loans have low rates. And, if you sign up for autopay, you could save even more.
Plus, at SoFi, unsecured personal loans are available in amounts up to $100,000. You could use funds for credit card consolidation, home improvements, relocation assistance, unexpected medical expenses, major personal purchases, and more.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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