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Published 19 October 2022

What Can You Use as Collateral for a Loan?

Collateral loans are secured loans that use an asset as security for the money you borrow. This will typically be your home, but lenders might consider vehicles and other types of asset too.

Collateral for a loan is where you agree to put forward an asset that you own as security when you borrow money. This asset is usually your property or maybe your car, but when collateral is involved in this way, you’re getting what is known as a secured loan.

Here we look in greater depth at the types of loan collateral that can be used and what you may want to consider before going ahead with a loan that requires you to use collateral.

How collateral works for a loan

Using collateral as security against a loan reduces the financial risk to the lender. That’s because if you don’t repay your loan, it has the option to recover the asset or property to pay off the balance.

This safety net for the lender means you might find it easier to get a collateral loan than an unsecured loan where you don’t need security, particularly if you have bad credit. Interest rates might be lower too with a secured loan when compared with an unsecured loan. Of course, the risk to you is that you could lose the asset if you default on the loan.

Types of collateral you can use for a loan

The main types of collateral that you can generally use as security for a loan include:

Property

When you take out a mortgage, your home is the collateral for the mortgage loan and, potentially, for any additional mortgage borrowing, such as:

Securing additional loans on your home is a big decision and may involve fees and higher interest rates than your existing mortgage loan. You usually need to use a mortgage broker to get a second charge mortgage.

» MORE: Should you take out a loan against property?

Vehicles

Some vehicle finance agreements that aren’t personal loans, such as hire purchase and personal contract purchase (PCP), use the vehicle you’re financing as security.

This isn’t the same as a logbook loan, which is where you secure additional finance on a car you already own and can be a very expensive form of borrowing.

Other assets

Other options can include:

The type of collateral you can use will depend on its value, the type of loan you are applying for and the lender. The asset’s value usually needs to be more than the loan amount and helps decide the amount of money you could borrow, along with other factors such as your credit history and individual financial situation.

Whatever the asset, the risk is that if you default on the loan you could lose it.

Why choose a collateral loan?

Some loans don’t ask for collateral, so why might you choose one that does?

Pros of collateral loans

Some potential positives of a secured or collateral loan might be:

Cons of collateral loans

There is the risk that you could lose the asset, which may even be the home you live in, if you default on the loan. So you must be confident that repayments would be affordable throughout the loan term.

Secured loans may also include other disadvantages:

» MORE: How secured loans work

What happens if you default on a collateral loan?

If you miss loan repayments, the lender may contact you to ask you to pay what’s owed before the default happens. Contact the lender as soon as you realise you can’t make payments to see if you can agree on a way forward.

Defaulting on payment can affect your credit score and stay on your credit file for six years. This can make it harder to borrow money, as future lenders will see this when they run a credit check.

If you are in arrears, the lender may go on to repossess your home or take the asset and sell it to recoup costs.

» MORE: What to do if you get a default notice

Collateral loans alternatives

Taking out a secured loan needs a lot of thought. Explore other options before going ahead, which might include:

Whatever type of borrowing you decide on, comparing loans across providers can help you find the most competitive rates. A broker can also help you decide on the right loan and explain your options.

WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you don’t keep up repayments on a loan or any other debt secured on it.

Image source: Getty Images

About the Author

Holly Bennett

Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years.

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