Millions of Americans are struggling to keep up financially. According to Ramsey Solutions’ The State of Personal Finance in America Q4 2025, 34% of Americans (88 million U.S. adults) say they’re either struggling or in crisis with their finances.
When you’re short on cash and need to borrow, personal loans, including secured loans, might come up as an option.
But these are also collateral loans. So, what counts as collateral? And how do these loans stack up against unsecured ones?
What Is Collateral?
Collateral is an asset you own that secures a loan. It can be tangible, such as a car, or financial, such as a savings account. If you default, the lender can seize the property and sell it to recover its money.
Types of Collateral in Loans
Lenders accept different assets as collateral depending on the loan type and your situation.
Real Estate and Property
Real estate is the usual collateral for secured loans. Lenders take pledged homes, land and commercial property backing mortgages or business financing.
Financial Assets
You can secure some loans with a savings account, cash, or an investment account. Banks and credit unions can also consider stocks, bonds, and certificates of deposit (CDs).
Business Assets
Businesses are able to borrow money for day-to-day operations using inventory, accounts receivable, and equipment. These are used to guarantee short-term debts or lines of credit for working capital purposes.
Vehicles and Equipment
Cars, trucks, and machinery are standard collateral for auto and equipment loans. The vehicle or equipment you’re financing typically serves as the security for the loan.
Specialized and Intangible Assets
Some lenders will accept intellectual property, future cash flows, collectibles, and even cryptocurrency as collateral. These are not as common and often have higher interest rates and risk.
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Examples of Collateral Loans
Here are some common loans where borrowers use specific assets to secure the borrowed amount.
Residential Mortgages
With a mortgage, the house itself is used as collateral for the loan you accept. If you fall behind by at least 120 days, the lender may begin foreclosure.
After foreclosure, the lender owns and can sell the property. The sales proceeds are then used to pay off what you still owe on the loan.
Home Equity Loans
A home equity loan and a home equity line of credit (HELOC) allow you to borrow against the equity you have in your home. How much you can get depends on the value of your home, minus what you still owe.
Margin Trading
Investors borrow money from brokers to purchase additional shares, with the brokerage account serving as collateral. This enables them to buy more stock than they could with only their own money.
If the shares lose value, the broker demands payment to cover the loss immediately. Your account balance acts as security, and brokers can liquidate holdings if you can’t pay.
Auto Loans
Auto loans function much the same way mortgages do, but this time, lenders use your vehicle as collateral.
Secured Personal Loans
Secured personal loans allow you to borrow for many purposes. Cars and certificates of deposit are the usual collateral for these loans.
Secured Credit Cards
Secured credit cards involve depositing cash with the card issuer before being approved. The credit limit is generally equal to the security deposit you make.
Car Title Loans
Car title loans are short-term, high-interest loans that use your vehicle title as collateral. These loans typically come with extremely high rates and fees that can trap borrowers in debt.
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Loan Collateral Requirements
- Credit score: Your credit score and payment history show lenders how you handle debt. Higher scores typically mean lower interest rates and better loan terms.
- Collateral value: The value of your asset determines how much you can borrow. Lenders assess the asset type, marketability, and potential depreciation before approval.
- Professional appraisal: Lenders may require an appraisal to verify the collateral value accurately. This ensures the asset covers the loan if you can’t repay.
- Financial documents: You’ll need income verification, employment history, tax returns, and asset statements. These prove your financial stability and ability to make monthly payments.
Pros and Cons of Collateral Loans
Collateral loans have benefits and drawbacks you should weigh before putting up an asset.
Pros
- Larger loan amounts: You can borrow more because the collateral reduces lender risk.
- Lower interest rates: Secured loans have lower interest rates than unsecured loans.
- Easier approval: Weak credit history or lower income can still get you approved.
Cons
- Risk of losing collateral: If you miss payments, the lender can seize your asset.
- Longer approval process: Collateralized loans take more time due to collateral value assessments.
- Appraisal costs: You’ll pay for professional appraisals upfront.
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How to Get a Collateral Loan
Getting a secured loan involves the following steps:
Pull Your Credit Report First
Your credit score determines whether you’ll qualify and what interest rate you’ll pay on the loan. Even with collateral, bad credit can mean high rates or outright rejection from lenders.
Look for mistakes on your report and anything pulling your score down before you apply. You can grab one free report per year from the credit bureaus at AnnualCreditReport.com.
Get Quotes from Multiple Lenders
Different lenders offer different interest rates, loan amounts, terms, and collateral requirements for secured loans. Getting preapproved with a few lets you see what’s actually available based on your financial situation.
Prequalification is based on what you tell them, but preapproval digs into your income and assets. Preapproval shows you what you can realistically borrow and afford to pay back each month.
Look at the Details of Each Offer
Once you get preapproval letters, compare the interest rate, repayment period, fees, and what collateral they want. Lower rates and shorter terms cost less overall, but your monthly payments will be steeper.
Get Your Paperwork Together and Apply
Lenders want to see pay stubs, photo ID, tax returns, bank statements, and investment account statements before approval. Having everything ready cuts down on delays and shows you’re serious about the loan application.
Get the Money and Start Repaying
Once approved, the lender sends the funds to you or directly to the seller if applicable.
You can use the money however you planned, like paying off debt or covering big expenses. If you miss payments, you risk losing whatever collateral you pledged.
How to Choose the Best Collateral for Your Loan
Picking the right collateral helps you get better terms and avoid losing assets you can’t afford to lose.
Evaluate the Value of the Asset
Choose an asset worth at least as much as you need to borrow for the loan. Lenders give you a percentage of what the asset is worth, called the loan-to-value ratio.
Higher-value properties like real estate, cars, or equipment can get you bigger loan amounts from most lenders. Pick something that holds its value over time so depreciation doesn’t affect your loan terms.
Consider the Type of Loan
Different loans ask for different types of collateral. Lenders also have expectations based on what they’re used to accepting and what makes sense as security.
Matching what you put up to the loan type helps you get approved and score better rates.
Assess the Risk of Losing the Asset
Putting up something important to you or your business as collateral is risky if you can’t repay. Think hard about how losing that asset would actually affect your life or business before you commit.
Review the Asset’s Liquidity
Liquidity is how quickly an asset can be sold and turned into cash if needed. Banks like liquid assets, such as savings accounts or investment accounts, because they can sell them,
Assets like collectibles or intellectual property are usually harder to move and sell quickly. This means higher interest rates, or lenders just won’t accept them during the approval process.
Check Lender’s Collateral Requirements
Every lender has their own rules about what collateral it will accept for secured loans or personal loans. Check the lender’s requirements before you apply so you know your asset actually qualifies for their program.
Frequently Asked Questions
Is a collateral loan a good idea?
It depends on your situation. Collateral loans offer lower interest rates and larger amounts, but you risk losing the asset if you can’t repay. Only consider them if you’re confident you can make monthly payments.
Is it better to get a secured or unsecured loan?
It depends on what you need and your credit. Secured loans have lower rates and higher amounts but require collateral. Unsecured loans are faster and safer for your assets but come with higher interest rates.
Do secured loans hurt your credit?
Yes, they can. Missing payments on a secured loan damages your credit history just like any other debt. However, making on-time payments can actually improve your credit score over time.
Conclusion
Collateral loans let you borrow more money with lower rates, but you’re putting up something valuable as backup. Before getting one, understand what you’re agreeing to and what happens if you can’t pay it back.
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