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Guide to Collateralized Personal Loans

What Are Collateralized Personal Loans?
Sheryl Nance-Nash
Sheryl Nance-NashUpdated April 6, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A collateralized personal loan, also known as a secured personal loan, is one that is backed by an asset, such as a car or a house. If the borrower were to fail to repay a personal loan with collateral, the lender could seize that asset. Though there is that risk, the upside is that collateralized loans may have lower interest rates and be easier to get because there is collateral backing the loan.Read on for a more in-depth overview of collateralized loans and some tips on how to get a personal loan with collateral.

Collateralized Loans Definition

A collateralized loan is a lending product that gives the lender a security interest in the borrower’s asset in exchange for the borrower getting funding. The borrower pledges an asset as collateral, and the security interest generally gives the lender or lienholder the right to seize the collateral if the borrower fails to make required loan repayments as outlined in the loan contract. This is the collateralized loan meaning in a nutshell.With a collateralized loan, you agree that if you fail to repay the loan according to the contract, the lender has the right to take the property that’s securing the loan, which is known as the collateral. This differs from an unsecured personal loan, in which the lender relies on your credit history or debt-to-income ratio to determine your likelihood of repaying the loan.In a personal loan with collateral, the lender will typically put a lien against the property that’s being used to back the loan. The lien is what gives the lender or lienholder the legal right to take your property if you fail to pay back what you owe.And even though you’ve pledged your property as collateral — perhaps your home or car, for example — that doesn’t mean you can’t use it while you’re paying off the loan. There will simply be a lien on it until you pay off the loan and the lender removes the lien on your asset.

How Collateralized Personal Loans Work

Collateralized personal loans work and function similar to other forms of collateralized lending. Any asset a borrower owns — such as a car or fine jewelry — can serve as collateral on a personal loan. The lender may seize the asset as collateral if the borrower defaults on the loan.There are multiple types of personal loans, including collateralized or secured personal loans. A collateralized personal loan requires that the borrower pledge an asset as collateral. The borrower may have to provide proof of asset ownership, and the lender may conduct an appraisal to verify the value of the collateral.The value of the collateral may dictate how much funding the lender is willing to offer. If you own a car with a $5,000 appraised value and pledge it as collateral for a secured personal loan, the lender may offer a collateralized small personal loan of up to $4,000.Borrowers are typically required to make monthly payments toward the principal loan amount and any interest or fees owed over the life of the loan. Just like any other form of collateralized lending, the lender may seize your collateral if you default on a collateralized personal loan.

What Happens if You Don’t Pay Off Your Loan?

As mentioned above, the lender may seize your collateral if you default on a collateralized personal loan. Collateralized loans reduce risk to the lender, because the lender may seize the asset in the event of default.By definition, a collateral-based loan is a secured lending product that gives the lender a security interest in the borrower’s asset. The asset serves as collateral, and the security interest generally gives the lender or lienholder the right to seize the collateral if the borrower fails to make required payments as outlined in the loan agreement. Insuring your loan with credit insurance may protect you if you die or become unable to pay off your loan because of sickness.Recommended: Personal Loan Tips

Pros and Cons of Collateralized Personal Loans

For sure, it’s no small matter to face the possibility that if for some reason you can’t make good on paying back the lender, you risk losing something of significant value. Only you can decide whether it’s worth doing. Below we highlight some of the pros and cons of collateralized personal loans:

Pros of Collateralized Loans

There are advantages to collateralized personal loans, largely because the lender has the safety net of your collateral. Specifically, the pros of a collateralized personal loan may include:
  • The lender may offer a larger loan amount than if the loan was unsecured
  • The interest rates may be lower than with an unsecured loan
  • You may qualify for a loan even if your credit scores aren’t stellar
  • For those with little credit, a secured loan can be a way to build credit

Cons of Collateralized Loans

Of course, there are downsides to getting a collateralized loan to consider. Specifically, the cons of a collateralized personal loan may include:
  • You risk losing your collateral in the event of default
  • The application process may involve more paperwork than an unsecured loan application
  • The lender may demand an appraisal to verify the value of the collateral
  • You may have limited time or no right to repurchase, reclaim, or redeem your asset if you default on the loan
The difference between secured vs. unsecured loans is that secured loans are collateralized, whereas unsecured loans are not. The below table highlights the pros and cons of collateralized personal loans:
Pros of collateralized personal loansCons of collateralized personal loans
You may qualify for a larger loan amount by pledging an asset as collateralYou can lose your collateral if you default on the loan
You may qualify for a lower interest rate by pledging as asset as collateralThe application process can be time-consuming
You may qualify for a loan even if your credit scores aren’t stellarThe value of your collateral is not necessarily determined by you or your wishes
Can help you build creditYou may have limited time or no right to reclaim your collateral if the lender seizes it to cure a default

What Qualifies as Collateral for Personal Loans?

A number of assets may be accepted as collateral for a personal loan, such as real estate, vehicles, and other investments as outlined below:

Real Estate 

You can use your home as collateral for a loan. As this is likely your biggest asset, consider if this should be your first choice. It may not be, unless you are as close as humanly possible to being 100% certain that you can pay back the loan.If you’re a homeowner with sufficient home equity, you might also consider the differences between personal loans vs. home equity loans to see what may be better for your situation.


Your car can do more than get you from Point A to Point B — you can also use your car as collateral for a secured personal loan. The loan is secured by the vehicle’s value, which is usually taken from what’s estimated in the Kelley Blue Book® (, if you don’t hold up your end of the deal, you could lose your car. Know too, that if your car is a clunker, it’s not likely to dazzle a lender into offering you a loan.Ask the lender about requirements. Also keep in mind that you won’t be able to sell your car while it is being used as collateral.

Other Investments

If you’re understandably nervous about putting your home or car on the line, you have other options, including stocks, bonds, antiques, cash in a savings account, certificates of deposit, jewelry, or collectibles of value.Look through your assets to see where you might get what you need and for the least amount of pain if things go south and you can’t pay back the lender.

Alternatives to Collateralized Personal Loans 

Here’s a question to consider: Should you get a personal loan with collateral? If you determine that a collateralized personal loan is not right for you, here are some alternatives you may explore: 
  • An unsecured personal loan. Among the different kinds of personal loans, another option to explore is an unsecured personal loan. This might be a good option if you have a good credit score, as you may qualify for good or average interest rates. 
  • Borrowing from family or friends. You might turn to family and friends to get the funds you need with a family loan. Just keep in mind that if you fail to repay the amount borrowed in a timely manner, your relationship with that person might be on the line.
  • A secured credit card. If you’re looking for a way to build credit, a secured credit card could be an answer and alternative to personal loans. 
These alternatives to collateralized personal loans may have their own set of pros and cons. The interest rates you get on an unsecured personal loan, for example, may be higher than the interest rates you might get on a secured personal loan.With a secured credit card, you put down a deposit that’s typically equal in amount to your credit line. The issuer can hold the deposit if you don’t pay your bill.

Where Can You Find Collateralized Personal Loans?

Banks, credit unions, and lenders of online personal loans may offer collateralized loans. You may find collateralized personal loans at a variety of financial institutions that offer consumer loans.As mentioned earlier, a collateral-based loan is a secured lending product that gives the lender a security interest in the borrower’s asset. A number of lenders, including private lenders, may offer collateralized personal loans.

5 Steps to Applying for a Collateralized Personal Loan

If you’re ready to pursue a collateralized personal loan, here are five steps you may take to apply for one:

1. Get Your Paperwork Ready and Sorted

The first step is to take the time to get your documentation in order before applying. For starters, you’ll need proof that you own the asset. Also expect to be asked about your credit history and credit score. The lender will also likely request to see bank statements and proof of income.

2. Request Your Free Credit Report

You can request and review your free credit report yourself before applying for a collateralized personal loan.Reading your credit report can help you analyze your credit history. This exercise can also give you the opportunity to look for any errors that may appear on your credit report. You can dispute any possible mistakes on your credit reports and ask the credit bureaus to correct any erroneous credit tradelines accordingly.

3. Shop Around and Compare Offers

Once your paperwork is sorted, be prepared to shop around. Like all financial products, each lender has its own requirements and pluses and minuses. Examine them closely, and consider various options, from banks to credit unions to online lenders. You can check for prequalified loan offers as part of this process.

4. Complete and Submit Your Loan Application

When you’re ready, you can complete and submit your personal loan application with the lender of your choice. There’s no guarantee a lender will approve your application, but pledging an asset as collateral with proof of ownership may bolster your personal loan approval odds.

5. Accept the Loan

If you’re approved, you can sign the collateralized personal loan offer and use the funds for personal, family, or household purposes. With online applications, you may receive the funds within several business days.

Checking Your Personal Loan Rate

There are potential upsides to a collateralized personal loan, including potentially getting a lower interest rate, more money, and more time to pay back the funds than you would with an unsecured personal loan. However, these upsides are largely due to the fact that the lender can seize your collateral if you fail to repay what you owe. As long as you’re confident you can successfully pay back a collateralized loan, it may be a viable option.If you’re interested in comparing personal loan offers, Lantern by SoFi can help. Just complete a simple form, check your personal loan rates, and consider applying with a lender of your choice.Find online personal loans with Lantern.

Frequently Asked Questions

What is an example of a collateralized loan?
Which kinds of loans are typically collateralized?
What assets can serve as collateral on a loan?
Photo credit: iStock/FG Trade

About the Author

Sheryl Nance-Nash

Sheryl Nance-Nash

Sheryl Nance-Nash is a freelance writer specializing in personal finance, business, and travel. Her work has appeared in Money Magazine, Newsday, The New York Times, Business Insider,, AARP the Magazine,,, among others.
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