Can a Bank or Credit Union Change an Unsecured Loan to a Secured Loan?

Your car may be used as collateral.

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A secured loan is one in which the borrower pledges an asset such as property or a vehicle as collateral for the loan. An unsecured loan is based on the buyer's creditworthiness, rather than being backed by collateral. Unsecured loans are high-risk loans for a lender, who issues an unsecured loan based solely on the belief that you'll make the loan payments on time and eventually pay the loan off in full. Since these loans don't have collateral (such as a home or car) that the lender can repossess in the event the buyer defaults on the payments, if something causes the lender to become concerned about your ability to pay, or that there is some reason you may not do so, it may require the loan to be secured.

Loan Modifications

Lenders typically insert a clause into closing documents, allowing them to modify the terms of your loan at any time. Modifications can include reducing the amount of credit available to you, changing the interest rate, and requiring collateral. Many borrowers experienced this around 2008, when a number of banks reduced credit card limits, froze home equity lines of credit and closed unsecured lines of credit -- all without warning borrowers.


Regulators from the Department of Financial Institutions perform compliance checks to ensure that lenders review their loan portfolios on a regular basis. Based on those reviews, lenders may be required to convert certain unsecured loans into secured loans to reduce the overall risk to the bank's loan portfolio. Even if you've made timely payments, the bank could require your loan to become secured due to DFI requirements.


A lender will provide you with a notice if your unsecured loan now requires collateral. The notice should explain how much collateral is necessary, the type of collateral required, and when it's needed.

Pay It Off

Call the bank and discuss your options. If you do not want to provide collateral, ask the attendant to put you on a schedule to pay off the loan.


The bank has the right to call your loan due, modify the terms and adjust the interest rate, but cannot collateralize a loan or secure it without your permission. You have to sign legal documents providing them with collateral.


If you decline the bank's request for security, it will probably require you to pay off the loan, or line of credit. You then need to weigh the risk associated with securing a loan. If you default, the bank can seize the collateral. On the other hand, you would not have the credit facility available. Make your decision on your personal financial situation and needs, not the bank's request.

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About the Author

Bethany Wood has been a writer since 2003. She contributes to magazines, industry publications, websites and various businesses.

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