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

There are ways a bank or credit union can convert an unsecured loan to a secured one.

There are ways a bank or credit union can convert an unsecured loan to a secured one.

Unsecured loans have no assets pledged as collateral, whereas secured loans have hard or soft assets pledged. Either type of loan can be used for business or personal purposes. Hard assets are items such as real estate, vehicles or equipment. Soft assets are intangible in nature and are usually business assets such as accounts receivable or goodwill – the intangible value often shown on a company’s balance sheet. If the borrower does not make unsecured loan payments on time, the bank or credit union can take steps to require collateral to avoid a demand for immediate repayment in full of the outstanding balance. As a borrower, you should thoroughly study all the loan documents before signing to make sure you understand what the bank can do in such circumstances. A bank or credit union can change an unsecured loan to a secured loan, but only under certain conditions.


Depending on local and state banking laws, a bank or credit union may be able to require that you sign an additional document during the term of the loan, known as a modification. If you have fallen behind in payments on an unsecured loan, the bank or credit union may require the addition of collateral to keep the loan in place.


A bank or credit union may require a full refinance to avoid a demand for payment in full. This is more expensive for the borrower, as she will usually incur closing costs tied to collateral valuation and other fees if the organization requires real estate collateral, for example. With a refinance, the borrower must start over with a whole new loan, with the required collateral now part of the deal.

Principal Reduction

In lieu of requiring an addition of collateral, the bank or credit union might require you to pay down the loan balance by a certain amount to keep the loan in place. Though laws vary by state, the lender can usually only take this action when the loan has matured with a balance outstanding. If the loan is a balloon mortgage, for example, it would have a fixed payment amount based on a long term amortization -- say, 15 years -- but mature in three years. This is often the case with long-term business loans. To renew the loan, the lender might require a principal reduction to a smaller, more comfortable loan amount.

Demand in Full

Usually, bank and credit union loan documents have a provision that allows lenders to demand full and immediate loan repayment only under certain conditions. Business loans typically have wording to the effect that the note can be called if the borrower takes on a "condition unsatisfactory to the lender." Unsatisfactory conditions might include falling behind on payments or a deterioration of the borrower's financial condition. In such cases, your options may be limited, but you could offer to pledge collateral instead and keep the loan in place.

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About the Author

Based in Atlanta, Steve Walker has a 28-year background in commercial and retail banking. Throughout his career, Walker has written extensively on behalf of his small business clients, analyzing their financial condition and making recommendations on their borrowing options. He holds a Bachelors degree in business administration from Furman University.

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