What do lenders accept as collateral for loans?

Loan collateral is when a borrower guarantees repayment of a loan by offering up an asset or property as security. So the collateral can be claimed by the lender if the borrower fails to pay back the loan as agreed.

By securing a loan, you’re reducing most of the risk assumed by the lender. When you’re struggling to find a loan with the terms you need (say, not as much as you need, or not at a rate you’re comfortable with), then collateral could an option to explore. Provided you’re OK with the idea of losing that collateral if something goes wrong.

When would I consider putting up collateral?

You might want to consider backing your loan with collateral in the following situations:

• You need to borrow a lot of money. Banks typically want security for anything over about £20,000, but that figure will vary from person to person… If you’ve never borrowed money before, for example, it’ll be much much lower.
• You don’t have good credit, and so are struggling to get the loan you want. For better of worse, from a lender’s point of view, your credit record is one of the best ways to gauge the likelihood you’ll repay the loan you’re asking for.
• Your income is hard to prove, and so are struggling to get the loan you want. For example if your business is a one-person show, you might have trouble proving you have a steady income to a lender.
• You already have a lot of debt (and perhaps want to restructure it). You’ll have trouble finding any personal loan with a debt-to-income ratio (DTI) above 43%. But even if it’s just under that number, you might not be able to qualify for unsecured financing.
• You own a valuable asset (or assets), and would like to free-up funds without selling it. Your collateral is key to a secured loan. Owning a home, a car — without any debt — makes you eligible for larger loan amounts.

Secured loans: next steps

To explore whether the equity in your home could give you access to larger loans or better rates, you may wish to speak to an expert and get personalised quotes, or just get a sense of the products available generally on the secured loans market.

Why do some loans require collateral?

Simply because it reduces the risk to the lender. Lenders specialising in business loans typically want collateral of some kind to minimise their risk of taking you on as a borrower.

If your small business is new or hasn’t yet found its footing, you may not have the revenue to assure a lender that you’re able to keep up with potential payments. Promising an asset or property that’s worth the cost of the loan cuts that risk down.

The same principle applies to complex loans like those for cars, homes or even large personal purchases. All such loans can require collateral to ensure some form of repayment. Sometimes the collateral is the car, home or item you’re buying with the loan.

What types of collateral can I use on a loan?

While you could technically use any valuable asset as collateral against a secured loan, lenders will generally only accept the equity you own in your house as security.

However, you may also be able to use a car, or the equity you have in another property, as collateral. If you’re planning on getting a loan to purchase an expensive asset, the lender may request that the item itself is used as security, in order to reduce the risk they’re taking on by giving you a loan.

Collateral accepted by loan type

Here are non-exhaustive lists of the collateral types typically accepted for personal and business loans.

Determining the value of your assets

Lenders typically offer you less money than the value of the asset you’re putting up as collateral — usually between 50% and 90% — though it can be even lower depending on the lender and the type of asset you’re using.

A more “liquid” asset is preferrable, i.e. the sort of thing which relatively-frequently and relatively-easily changes hands for a relatively-predictable price. Got a huge, one-off sculpture by a lesser-known artist? It might not be ideal collateral!

As a more realistic example, if you’re using an investment portfolio as your collateral, then because of the volatility of the investment, a lender might only offer you 50% of the value of the investments, just in case they lose value during the term of your loan.

With car loans, you’re usually offered 25% to 50% of the value of the car. When it comes to borrowing against your house, lenders generally let you borrow 80% of your loan-to-value ratio (LTV). The expression “safe as houses” says it all really – looking at UK house price trends, property is one of the best forms of collateral from a lender’s point of view.

Benefits and drawbacks of using collateral to secure a loan

Credit reporting for secured personal loans

Just like with unsecured personal loans, the lender you take out a secured personal loan with will report your payment history to these credit bureaus: Experian, Equifax and Crediva. If you make any late payments or default on the loan, it will remain on your credit report for seven years from the date of the original missed payment.

However, if the collateral tied to your secured personal loan is repossessed or confiscated, this will add even more negative marks to your credit history.

How to get a personal loan without collateral

Not sure you want to put your house, car or grandmother’s silver on the line? Unsecured personal loans are actually more common than secured loans. The application process is nearly the same, except you don’t need to take the extra steps involved with appraising your collateral or providing proof of ownership.

You can typically get an unsecured personal loan with competitive rates if you have:

• Good or excellent credit
• Steady income from a full-time job
• A low DTI

Bottom line

There are options aplenty when it comes to taking out a personal loan with or without securing it. When looking into a secured loan, consider your ability to repay the loan very seriously before taking one out. Defaulting on a secured loan means more than just damaging your credit score; you could lose the asset you put up for security.

If a secured loan doesn’t exactly fit your needs, you can consider unsecured loans that don’t require collateral.

Frequently asked questions

• If I have a poor credit score, am I still eligible for a secured loan?

  You might be. The requirements vary by lender, but you may be able to get a secured loan with less-than-perfect credit if your asset matches the lender’s criteria and you can prove your ability to repay the loan. Otherwise, you can consider bad credit personal loans.

• What can I use a secured loan for?

  In the case of personal loans, you can usually use the loan for any legitimate purpose. Car loans are typically restricted to cars or other recreational vehicles. Business loans are generally for business purposes only.

• What will I need to apply for a loan?

  Different lenders require different information and documentation. Generally, you’ll need to provide your personal contact information, date of birth, bank account information and employment and income information. For a business loan, you’ll also need to supply relevant information about your business.

Written by

Chris Lilly

Head of publishing

Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio

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