Racheal Vazquez

There are a wide variety of reasons why you may be looking to take out a secured personal loan. The type of collateral you use will depend on the loan you are looking to take out. 

When considering what type of collateral makes sense for you, you will want to determine how much cash you will need, what you will be using the money for, and how much you are comfortable to pay on a regular basis.

What can be used as collateral for a personal loan?

Though there are many options for collateral, here are six common types of security for loans you can choose, depending on your unique situation.

1. Home

Your collateral amount would be the difference between your home value and your remaining mortgage payment, resulting in your home equity. By using your own home as collateral, you can be eligible for a home equity loan, which is essentially taking out a second mortgage. You will likely be able to borrow up to 85% of your property’s equity.

A home equity loan is a significant lump sum of cash; ideal for one-time events, such as home renovations, weddings, or other expensive life events. Home equity loans can also be an expensive process in themselves – they include loan-processing fees, appraisal fees, and closing costs. This is similar to the fees you would have experienced with obtaining a mortgage.

Since a home equity loan provides a large sum of cash and comes with high fees, it is not ideal for smaller expenses. Should you require a smaller loan amount, you may find it more beneficial to consider a home equity line of credit (HELOC), which is similar to a credit card. You are still using your home equity as collateral, but you are not receiving cash up front like you would with a home equity loan. 

Using a HELOC, you can borrow necessary funds over a predetermined period of time. You can expect to receive a credit limit of up to 85% of your home equity. Instead, you are allowed to use as much or as little as possible of your available balance. Once you pay off what you use, you can use it over and over, until your established borrowing time period has ended. 

When applying for a home equity loan or HELOC, you can expect to have your home value and mortgage payments appraised as these values determine the loan you receive and interest rate. Additionally, your personal credit score, employment history, and earned income will affect your loan amount and the interest rate you qualify for.

2. Vehicles

Similar to using your home as collateral, your car equity factors into the amount of money you can get as a loan. This would be the difference between your car’s current market value and the amount owed in remaining payments. 

With your vehicle as your collateral, you can qualify for an auto equity loan, and you give the lender the ability to seize the vehicle if you are unable to make your loan payments. When applying for the loan, you can expect to pay lien fees and a few additional charges that will factor into your long-term loan payment. 

The auto equity loan provides you with a lump sum of cash, though smaller than what you might expect for a home equity loan. This would usually be best for smaller payments, or during an emergency.

You can also apply for a car title loan and use the title on the car as collateral. This means that your lender has legal ownership over your vehicle until you have paid back your debt. You can expect to receive between 25-50% of your car’s value. However, these loans are fairly expensive as they come with a large interest rate and a short maturity date, around a month. Car title loans are generally not ideal, but if you were to choose between an equity loan or title loan, an equity loan is much more affordable. 

3. Investment Accounts

In addition to using tangible assets such as your house or your car, you can also offer your personal investment accounts as collateral, which are classified as securities-based or stock-based loans. These loans can equate to 50-70% of your investment portfolio. You can apply for these kinds of loans at your brokerage or bank where you have your investment accounts.

Your investment portfolios may fluctuate dramatically depending on the performance of the stock market, and if your investments drop significantly over the course of your loan period, you may be required to pay the difference at the request of your lender.

Before you consider this type of loan, you will want to confirm if your investment portfolio is eligible. 

4. Savings Accounts

Savings-secured or certificate-secured loans use your savings account or a certificate of deposit as collateral. While borrowing, you’re able to keep funds in your account, so you can continue to accumulate interest. You can expect to receive up to around 90% of what is in your account.

In addition to getting the funds you need, these types of personal loans can also be advantageous to building a good credit score. Because it’s a relatively low-risk loan for the lender, the interest rate will not be that high. If you’re using the loan to rebuild your credit, you can utilize the cash from the loan directly to repay it. This can pose a lower risk than a credit card as the interest rates are much higher for credit cards.

5. Art Collection

A far more specific type of loan is using your personal art collection as collateral, and receiving the funds you need without having to move or give up your collection – it can stay where it is throughout the process. To determine the monetary amount you will receive for your loan, you will have to get your art appraised. The appraisal will identify how much your art is worth and will contribute to how much capital you will receive.

Once you’ve had your art appraised, you will be able to receive your loan from your chosen credit union or bank. You can expect to receive somewhere around 50% of your art’s appraised value. These loans can provide up to millions of dollars depending on the value of your art. 

6. Valuable Items

Similar to fine art, you can use other valuable and expensive items as collateral. This can include rare collection pieces, jewelry, antiques, and more. The process of using these items as collateral varies widely as you will need to speak with your lender to find out the details and see how much you will qualify.

Once you’ve identified the item you would like to use as collateral, when discussing the terms and conditions of your loan with your lender you will want to ensure they are clear about how much they are willing to lend, and the expectations associated with the loan. You will want to be thorough with your research and ensure all your questions are answered.

What’s Right For You

If you decide to take out a personal loan and need collateral to secure it, there are plenty of options to choose from. You’ll have varied experiences with interest rates and how much you can expect to receive. This will depend on your lender and the terms and conditions. 

When you decide on a secured loan, consider your ability to repay the debt because a secured loan can damage more than just your credit score – you could end up losing your asset in the process.

If you’re not interested in putting up collateral, you can look into unsecured personal loans. As always, it’s best to do in-depth research into interest rates and other details before you decide on a bank or credit union.

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