Most personal loans are unsecured, based solely on your financial history: credit score, income and debts. But if your credit score can’t snag you an unsecured loan, lenders may offer you a secured loan, also known as a collateral loan.
A secured loan enables you to pledge the title to your vehicle, savings account or another asset in return for a lower rate or a more significant loan amount. The downside: If you don’t make timely payments, the lender can seize your asset, and your credit score will suffer.
SECURED PERSONAL LOANS
Banks, credit unions and some online lenders offer secured loans.
*Terms are for unsecured loans; they may vary for secured loans.
What can you use to secure a personal loan?
YOU CAN BORROW AGAINST YOUR CAR
The vast majority of secured personal loans use a car as collateral. These auto equity loans let you borrow money against the market value of your paid-off car.
A lender that accepts your car as collateral may require you to insure it for physical damage, naming the lender as a loss payee if it’s totalled. Suppose you dropped collision and comprehensive coverage on your paid-off car to save money. In that case, lenders may sell you optional credit insurance, which is often more expensive than the cheapest full coverage.
There are two other options to borrow against your car:
- Auto refinance is an option if you still owe money on your car but have substantial equity. Refinancing replaces your original loan with a new loan at a higher amount. You keep the extra cash. (You’ll likely qualify for a refinance if your credit has improved or interest rates have dropped.)
- Auto title loans, which typically have annual percentage rates as high as 300%, don’t require a credit check and carry a higher risk of repossessing your vehicle. NerdWallet does not recommend auto title loans.
YOU CAN BORROW AGAINST YOUR SAVINGS
If you have money in a savings account, it’s cheaper to use it rather than get a personal loan that charges interest. If you must hang on to your savings or need more money than what’s in your account, some lenders will make secured personal loans with savings accounts or certificates of deposits as collateral. You likely won’t have access to your account or CD until you repay the loan.
It can make sense to secure a loan against a CD — instead of a savings account — because withdrawing money from a CD can incur an early withdrawal penalty. You’ll want to compare that penalty with the interest charge on a personal loan.
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Where to get a secured personal loan
Of the nation’s five largest banks by deposits, only Wells Fargo allows those with savings accounts or CDs to use them as collateral to qualify for a loan or get a lower interest rate. The bank also offers CD-secured lines of credit that are different from loans. Borrowers cannot touch the money in their account for the duration of the loan.