Collateral for a Secured Loan

Very few lenders are prepared to loan significant amounts of money to an unknown borrower if they are not able to offset the risk with a guarantee that payments will be made. To reduce risk, lenders usually require borrowers to agree to name valuable assets which could be sold at auction to recoup the outstanding debt if they fail to make repayments. In other words, in order to be offered a 'secured' personal loan, borrowers have to risk the ownership of a valuable asset: commonly their home. These valuable assets are known as 'collateral'.

Since it is impossible to predict your financial stability (or lack of it) over the course of the repayment term, this is not a decision which should be taken lightly. If no collateral is provided the lender will either consider the merit of the guarantor you provide, or refuse your secured loan application completely.

Assets which you may be able to use as collateral, other than your home, include motor vehicles such as cars, motorbikes and vans, and water vehicles such as boats. Applicants should however be aware that not all lenders will accept moveable property as security for a loan, and the conditions and interest rates attached to them can be less favourable than for loans secured against a property, to compensate for the greater risk of damage or loss with this type of asset.

To use your home or other asset as collateral for a loan, you might need to gain several independent valuations of its actual worth, although some lenders will provide this service for you. You may also need to provide the lender with details regarding any other debts that you have already secured against your home, such as your mortgage.