Getting approved for a loan can feel like hitting a wall when you’ve got poor or no credit. It’s frustrating, especially when you know you can manage the repayments but need a lender to give you a chance.
Sometimes, backing your loan with collateral is what helps make that possible. It’s a practical way to boost your chances and might even help you access better terms, too.
What is collateral?
Collateral is something you agree to put up as security when you take out a loan. It’s usually an asset you already own, like a car, savings account, or even a piece of jewellery, that holds enough value to reassure the lender they won’t lose out if you stop making payments.
If things go to plan and you manage your loan repayments, your collateral is untouched. But if you can’t keep up with payments, the lender has the right to seize the collateral and sell it to recover the money you owe.
What can be used as collateral for a personal loan?
If you are applying for a personal loan for bad credit, offering something you already own as security can help improve your chances. Lenders will usually consider types of collateral that they can easily value and recover if needed.
Here are some examples of what can be used:
- Vehicles – If you own a car, motorbike, RV, truck, or even a boat, it’s often the first thing lenders will look at. Even older vehicles might qualify if they’re still in good shape and fully paid off.
- Valuables – If you own jewelry, collectables, or machinery and tools with a clear resale value you may be able to use these, depending on the lender.
- Savings or Cash Deposits – If you have savings set aside, some lenders will allow you to use this as collateral to secure the loan. It’s a lower-risk option since the funds are easy to access and hold.
- Home Equity – If you own your home (or have equity in it), you can use this for a secured personal loan, though it’s a higher risk.
- Insurance Policies – Some lenders accept life insurance policies with cash value as collateral. You’ll usually need to show documentation of the policy and its value, and the lender may place a lien on it until the loan is paid off.
- Stocks & Shares – If you hold investments like stocks or bonds, these may also be used to back a loan. This depends on the lender and the type of investments, but they need to be easy to value and liquidate if needed.
How Collateral Works For Each Type of Loan
How collateral works depends on the type of personal loan you are applying for. Some loans are designed to be backed by an asset, while others don’t require it at all.
Secured Loans
With a secured loan, the lender agrees to lend you money based on the value of something you own. This item (your collateral) is your safety net. If you don’t repay the loan, the lender can take the asset and sell it to get their money back.
Because there’s less risk for the lender, secured loans often come with better approval rates, even if your personal credit report isn’t great. You might also be offered a lower interest rate or a higher loan amount compared to unsecured options.
Unsecured Personal Loans
Unsecured loans like payday loans for bad credit, or monthly installment loans don’t require collateral. Approval is based mainly on your credit score, income, and your ability to repay. If you have strong credit, this can be a quicker, simpler option.
However, unsecured loans can be harder to qualify for if you have poor credit or a limited credit history. They usually have higher interest rates, lower borrowing limits, and stricter approval criteria.
If you’ve been turned down for unsecured loans in the past, having collateral could make all the difference in getting the help you need.
Pros and Cons of Using Collateral for a Personal Loan
Like anything, using collateral for a personal loan isn’t without risk. Here’s what to weigh up:
Pros
- Better Chance of Approval – If your credit history is limited or damaged, collateral shows lenders you’re committed to paying back the loan.
- Lower Interest Rates – Because the lender takes on less risk, you might qualify for a lower rate.
- Higher Borrowing Limits – You may be able to borrow more if you’re signing over something valuable.
- Build or Improve Credit – Making payments on time can help improve your credit score.
Cons
- Risk of Losing Your Asset – If you fall behind on payments, the lender has the right to take and sell the item you’ve used as collateral.
- Appraisal Delays – Some lenders will want to inspect or appraise your item before approving the loan, which can take time.
- Limited Item Acceptance – Not all lenders will accept every type of asset, and some items lose value quickly, which can affect your loan amount.
- More Paperwork – Secured loans can sometimes involve a bit more documentation, like proof of ownership or an appraisal.
Things to Know Before You Sign A Collateral Loan Agreement
Before you agree to any loan, especially one that involves collateral, it’s important to take a moment to go through the details carefully. Here are a few things to look out for:
1. What happens if you miss a payment?
Make sure you understand the lender’s policy on late or missed payments. If your loan is secured, your asset could be at risk sooner than you think. Ask about grace periods, fees, and what steps the lender takes before repossession.
2. The Real Cost of the Loan
Look beyond the monthly payment. Check the APR (Annual Percentage Rate), which includes interest and any extra fees. A loan that looks cheap upfront can cost a lot more over time if the APR is high.
3. Loan Terms & Flexibility
How long will the loan last? Can you pay it off early without penalties? It’s worth knowing whether you’ll be locked into the agreement for the full term, or if you have some room to pay it off quicker and save on interest.
4. What the Lender Can Do With Your Collateral
Once you agree on something as security, you’re giving the lender partial control over it. Make sure the agreement clearly explains when the lender can claim the asset and how the process works if you default.
5. Your Budget & Ability to Repay
It’s easy to get caught up in getting approved, especially if you’ve been turned down before, but make sure the repayments fit your budget. A loan shouldn’t add stress to your finances. It should help you move forward.
Need help getting a personal loan?
If your credit history is holding you back, you’re not out of options. At Yup Loans, we understand that real life doesn’t always fit into a credit score.
That’s why we work with a wide network of lenders who look beyond the numbers. Whether you’ve been turned down elsewhere or need a lender who’s willing to listen, we’re here to help.
Request funds today, and we’ll do everything we can to help you find a suitable loan.
FAQs About Using Collateral for a Loan
Can I use my vehicle as collateral on a personal loan?
If you own your car or truck outright, some lenders will accept it as collateral for a loan. You’ll need to show things like the title and proof of insurance. But keep in mind, if you can’t repay the loan, the lender might take your vehicle, which could make it harder to get to work or manage daily life.
Can I get a personal loan without collateral?
You can get a personal loan without collateral, called an unsecured loan. We work with lenders who regularly approve people with poor or no credit, making it easier for people to get the funds they need without the complication of agreeing on an asset as collateral.
Can I use the same asset as collateral for different loans?
Most lenders want to be the only ones who can claim your asset if you default on the loan. If it’s already being used to back another loan, you probably won’t be able to use it again.
Does the value of the collateral have to be the same as the loan amount?
The value of your collateral doesn’t have to match the loan amount dollar for dollar, but it usually needs to be worth more than the amount you’re borrowing.
Lenders want a bit of a buffer in case they need to sell the item to get their money back. For example, if you’re applying for a $2,000 loan, they might want your loan collateral to be worth $3,000 or more. That’s because they know they likely won’t get the full value back after fees, depreciation, or if they have to sell it quickly.
Each lender has its own rules, but in general, the more your collateral is worth, the better your chances of approval are, and the more you might be able to borrow.
Can I sell my loan collateral while I’m repaying the loan?
If you’ve taken out a loan that’s backed by collateral, like using your car as collateral, you’re agreeing to keep that item until you pay back the loan in full.
Selling something that’s been pledged as collateral while you’re still repaying the loan breaks that agreement. If you go ahead without permission:
- The lender can demand full repayment right away, which could be difficult if you’re not in a position to repay the loan in full.
- Legal action is possible, especially if the lender can’t recover what they’re owed from the collateral.
- Your credit could take a hit, making it harder to qualify for future loans.
- You may still owe money if the item you sold doesn’t cover what’s left on the loan.
It’s important to speak with your lender before selling the asset. Some lenders may allow a sale if you’re replacing the item or clearing the balance, but only with their agreement.