Cash News
Most personal loans are unsecured, meaning that you don’t need collateral to get a loan. Instead, your lender will approve your loan based on your creditworthiness.
When you apply for a personal loan, your potential lender will review your credit history, income information, debts, and more to vet you and decide whether or not to extend a personal loan and if there will be any extra strings attached to your loan offer in the form of collateral.
Collateral is a physical asset against which you can borrow. Whether or not you’ll need to provide collateral for a loan can depend on a few factors, such as your loan amount, income, debt situation, and credit history.
Your financial institution may have certain restrictions that require collateral for personal loans above a certain amount or for customers who don’t meet their credit or income requirements.
A good credit score can be a telltale sign for your lender that you know how to manage credit responsibly and that they will be repaid.
If you’re having a hard time qualifying for a personal loan, collateral can sweeten the deal for your lender because it reduces the level of risk they assume by lending to you. For borrowers with lower credit scores, collateral can mean the difference between an approval and a rejection.
While you don’t technically need collateral to qualify for a personal loan, a collateral loan may offer a lower interest rate and repayment terms than unsecured loans and may increase your chances of a loan approval.
Collateral can come in a few different forms. At its core, it gives your lender an added layer of protection in case you fail to repay your loan. Certain types of loans have collateral built into them; for instance, your house serves as collateral for a mortgage loan, and your car serves as collateral for an auto loan.
For personal loans, types of collateral may include:
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Cash in your savings accounts
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Your certificates of deposit (CDs)
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Future paychecks
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Investments like your stocks or bonds
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Antiques and collectibles
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Fine art
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Jewelry
If you aren’t comfortable with putting some of your most valuable assets on the line for a personal loan, there are other options you can consider.
Your lender will review your credit history to decide whether or not they will approve your loan. If your lender rejects your application because of negative marks on your credit report, it may be time to pause the personal loan process until you’ve had a chance to get your score back on track.
A few ways to remedy a less-than-stellar credit score: Make on-time loan payments, avoid too many new credit applications, and prioritize reducing your existing debt balances. These actions account for 75% of your credit score, so it pays to practice good credit habits.
If your credit history doesn’t meet your lender’s standards, or perhaps your debt-to-income ratio is higher than it should be, you may still qualify for a personal loan if you get a co-signer or guarantor on your side. A guarantor promises to repay your loan if you fail to make monthly payments or default on your loan altogether.
A co-signer is similar to a guarantor, however, a co-signer is liable for a borrower’s debt from the very start of the loan disbursement while a guarantor is only liable once the borrower fails to make payments.
Larger loan amounts will typically require collateral because of the high level of risk your lender is assuming. Say you borrow a $100,000 loan; if you fail to repay that loan, your lender will take a sizeable financial hit. However, a smaller loan could be easier to qualify for without extra backing in the form of collateral, a co-signer, or a guarantor.
If you’re having difficulty qualifying for an unsecured personal loan, it may be worthwhile to consider alternative financing options. Depending on what you plan to use the funds for, you might be better off with a different type of financing.
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Credit cards: A credit card could offer some extra funds without the risk of losing a major asset. Of course, a credit card could carry a higher annual percentage rate (APR), meaning that you’ll pay more in interest over time.
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Line of credit: A personal line of credit allows you to borrow up to a predetermined limit from your lender. A line of credit can be accessed via check, bank transfer, or in-person withdrawals.
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Buy now, pay later (BNPL): Depending on the amount you’re borrowing, a BNPL can help you break up your purchase into more manageable payments. It’s important to note that BNPL loans are limited in terms of how much you can borrow and may not offer many flexible repayment options.
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Home equity loan: If you’ve built up equity in your home, you could tap into that and borrow against your home. Depending on your equity, you may be able to borrow more than you would with a personal loan.
If you’re unsure whether a personal loan is right for you, it doesn’t hurt to get prequalified through your preferred lender, or a few of them, to better understand your eligibility and loan options and then make a decision about the best financing option for your needs.