Personal Loans

How Do Collateral Loans Work?

Need to borrow money? A little collateral might make the process of qualifying for financing easier — and perhaps more affordable, too.

Here’s a breakdown of what collateral loans are, how they work and some common examples of their uses.

What is a collateral loan?

Also known as a secured loan, a collateral loan is guaranteed by something you own, such as your car, home or even savings. The collateral protects your lender in case you default. If you default on your debt, your lender can take the collateral. That’s why collateral loans often have better rates than unsecured loans, which don’t require collateral. Although the rates may be better, if you can’t repay the loan, you could lose your vehicle or whatever you had used as collateral.

Types of collateral loans

There are many different types of collateral loans. However, a mortgage is a common example of one. A mortgage is backed by your home. If you fall behind on payments, your lender may foreclose on your home, which means they take possession of the property. Here are other examples of collateral loans:

Your options for a collateral loan

A secured personal loan is a well-known type of collateral loan. They can be a flexible financial product, allowing you to use funds for a variety of purposes, such as to cover medical costs or wedding expenses.

But not all secured personal loans are the same. You’ll find that different lenders offer different terms to different borrowers. After all, your credit history, income and other factors may be taken into account when you submit a loan application. That said, you should research lenders to find those that may offer you a loan at a low cost.

Here’s a glimpse at a few lenders offering secured personal loans.  As always, you should carefully consider your finances and whether or not you need to take out a loan before applying for one.


LightStream, a division of SunTrust Bank, advertises that it offers “loans for practically anything.”

  • Qualified borrowers may receive loans from $5,000 to $100,000.
  • Interest rates vary from 3.99% to 16.99%.
  • Borrowers with excellent credit will receive the lowest rate.
  • A 660 minimum credit score is required. Borrowers with good credit are more likely to qualify if their credit profiles contain:
    • Several years of credit history
    • Credit history that shows a variety of account types (e.g., credit cards, installment loans, etc.)
    • Good payment history
  • LightStream pulls a hard inquiry from Experian and Equifax when processing your loan application.

Wells Fargo

Wells Fargo offers secured loans for debt consolidation, major expenses and personal loans.

  • Qualified borrowers may receive loans from $3,000 to $100,000.
  • Fixed APR ranging from 7.49% to 24.49%.
  • Your final rate depends on the loan type and credit history.
  • Wells Fargo secured loans may have lower interest rates, larger loan amounts or better terms than unsecured loan options.
  • Minimum credit score requirement is not disclosed. Instead, the bank states, “The higher your credit score, the more you may be able to borrow and the lower the interest rate you could receive.”

OneMain Financial

OneMain Financial provides secured personal loans and auto loans that you can use for a variety of reasons from debt consolidation to home improvements to vacations.
Loan amounts range from $1,500 to $30,000 for qualified borrowers.

  • APRs on loans range from 16.05% to 35.99%.
    • Credit history
    • Financial history
    • Income and expenses
    • Loan purpose
    • Whether you have filed for bankruptcy
    • State of residenceTo determine loan eligibility, OneMain Financial will consider:

Can I get a loan without using collateral?

If you’re uncomfortable putting up personal assets to back your loan, an unsecured loan is an alternative financing option you might want to consider. Here are some of the benefits of unsecured loans that you may find attractive:

  • Unsecured loans are less risky as you don’t need to put down collateral.
  • The application process can be faster for unsecured loans.

Of course, you can’t look at the benefits of unsecured loans without considering the drawbacks:

  • Unsecured loans often feature higher interest rates, especially for borrowers with credit problems.
  • If you don’t have a good credit rating, you may have difficulty qualifying for some unsecured loans.

Regardless of the type of loan you’re considering, it’s important to research different lenders and examine your finances before applying.

The rates and fees mentioned in this article are accurate as of the date of publishing.


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