Secured Loans For Bad Credit
Getting A Secured Loan With Bad Credit
If you have a bad credit history, you may struggle to access loans when you need them. Secured borrowing can provide an ideal solution, allowing you to take out a loan even if you have a less than perfect credit history, including CCJs.
Maintaining a pristine credit score can sometimes seem like an uphill battle.
Life often throws up some unpredictable financial challenges, and past money mistakes can all take their toll on our level of creditworthiness.
However, a less-than-perfect credit history doesn't have to hold you back or spell the end of your search for a loan that you need.
Secured loans for bad credit can present an opportunity for you need access to funds while rebuilding your credit.
In this article, we’ll dive into the world of secured loans and explore how they can be used to help build your credit score and maintain financial health.
We take a look at how these loans work, why they can be suitable for individuals with an adverse credit record, and what to consider before you apply for one of these loans.
What is bad credit?
Before we get into talking about secured loans, let’s clear up what bad credit actually means. This term is used in personal finance to describe a low credit score or a ropey credit history.
These things combined indicate past difficulties in managing credit or fulfilling certain financial obligations. To lenders, it signifies a higher risk that you will fail to make timely payments.
Credit scores, usually ranging from around 300 to 850, are numerical representations of your overall creditworthiness.
They’re calculated based on a few different factors, including payment history, your level of credit utilisation, the length of your credit history, types of credit you’ve used, and any new credit applications you’ve made.
A low credit score is often given after you’ve made a few late payments, have historically carried high debt levels, have filed for bankruptcy, or just generally demonstrate a pattern of financial irresponsibility.
Lenders and financial institutions that you approach for a loan will use credit scores as an assessment tool when evaluating any application you make.
If you’re someone who has bad credit, you’ll be considered a higher risk borrower because your credit history suggests a stronger likelihood of loan default under future loan arrangements.
Consequently, you might find that you face challenges in obtaining the credit you need, or if you do manage to get a chance at borrowing, you may be offered loans which have less favourable terms attached to them.
Whilst bad credit can have significant implications on your financial life, it is possible to access credit if you know where to look.
What is a secured loan?
What does a ‘secured loan’ constitute exactly?
These loans are given their name as they’re backed, or ‘secured’, by collateral. This added layer of security serves as a cushion for the lender, lowering their level of risk.
Typically, you can use a valuable asset that you own as collateral, such as a property, a car, or potentially other items that are worth the same sum that you’re looking to borrow.
By offering collateral, you ultimately provide assurance to the lender that if you default on the loan they give you, the lender can seize the collateral to recover any losses they’ve sustained through this transaction.
The presence of collateral in the arrangement reduces the risk the lender takes on, making secured loans more accessible to individuals with bad credit or a less-than-perfect financial track record.
Because the lender has a tangible asset to access as security, they have a greater sense of confidence of their position in the loan agreement.
As a result, you may be able to expect more attractive terms than you’d get with an unsecured loan. This can include things like lower interest rates payable and higher borrowing limits.
Is a house the only thing I can use as collateral in a secured loan?
A common misconception is that a house is needed as collateral in a secured loan.
While using a property as loan security is highly common in mortgage loans, there are various other assets which work as collateral, depending on the type of loan you get and the lender's specific requirements.
Property
Besides a house, other types of property can be used as collateral for a loan. Land, commercial properties, or holiday homes can be used for secured loans.
Vehicles
A vehicle you use on a regular basis, or for leisure, can be brought in as collateral in a secured loan agreement. This could be anything from a car to a boat or motorhome.
Usually, you’ll be able to keep using this vehicle as normal, but if you miss your loan payment, you’ll be at risk of losing the vehicle you used as collateral.
Savings or Deposit Accounts
As well as physical objects, some lenders may accept cash deposits or savings accounts as collateral for loans they can offer you. These are often referred to as ‘secured savings’ or ‘secured deposit’ loans.
Investments
Certain categories of investments you may have in your portfolio, such as stocks, bonds, or mutual funds, can also be eligible as collateral for loans.
Check with your lender of choice to see if these assets qualify.
High-Value Assets
You may also be able to use valuable items like jewellery, high art, priceless antiques, or high-end electronic equipment may be considered as collateral for specific loans.
This is not always the case, so it’s best to clarify this with your lender before making an application to avoid getting rejected.
What’s the bottom line?
It's important to note that the acceptance of any collateral you have to offer may vary depending on the lender's individual policies, as well as the type of loan you're looking to get your hands on.
The value and marketability of the asset at hand also play a vital role in determining its eligibility as collateral. The lender will need to be sure that they can recoup their funds by selling the asset on.
When considering taking out a secured loan, it's highly advisable to consult with the lender in question to understand the specific collateral requirements and to assess the potential risks and benefits associated with using a particular asset as collateral.
Are there any downsides to secured loans for bad credit?
Secured loans can be a valid option if you have poor credit and need access to funds at a slightly better rate than you’d get with an unsecured loan.
They can be especially suitable in cases where your credit issues are in the past, and you’re confident you can repay your loan.
However, like any finance product, they do come with their own set of potential considerations that you should be aware of before pursuing this type of loan.
Firstly, there is the obvious risk of losing the collateral you’ve put up, although this will only happen if you miss loan payments.
Ultimately, if you fail to meet the loan obligations at hand, the lender holds the right to seize and sell the collateral you’ve put up as security to recover the debt under you.
This can be particularly concerning if the collateral is a valuable asset you use every day, like a home or a car.
Additionally, secured loans for bad credit often come with higher interest rates when compared to loans offered to those with exemplary credit records.
Lenders mitigate the risk at hand by charging higher rates to borrowers with poor credit, resulting in your borrowing costs increasing overall.
Another potential drawback at play is the limited availability of lenders who offer secured loans to borrowers with bad credit. This can reduce your options and make it harder to find favourable loan terms when you need them.
Furthermore, there is an added risk of overvaluation of collateral when taking out a secured loan, which can lead to inflated borrowing amounts and create a higher debt burden for you across the loan terms.
Last but not least, while a secured loan can help you on your way to rebuilding a positive credit standing, failure to make timely payments can inflict further damage to your credit score and make future borrowing more difficult.
With these points in mind, it can be advantageous to carefully assess your financial situation and manage the loan you take out responsibly to mitigate any risks.
What steps can I take to improve my credit score?
Improving your credit score is a gradual process, and one which requires effort and responsible financial behaviour on a consistent basis.
Thankfully, there are some straightforward steps to salvaging your credit profile. And improving your credit score can help ensure you get better terms on loans you apply for in the future.
Review your credit reports
It can be a good idea to start your journey to better credit by obtaining copies of your credit reports from the major credit bureaus. Equifax, Experian, and TransUnion are the biggest firms.
Take the time to review them carefully and be sure to check for any errors, inaccuracies, or fraudulent activity you can find which you don’t recognise. Checking for discrepancies can be helpful because you can dispute any errors on your credit record and have them corrected.
Pay bills on time
Making sure to prioritise paying all your bills, including credit card bills, loan payments, and utility bills, on time every time is a large factor that can help you build up your credit score.
You might consider setting up automatic payments or reminders to help you do this. This will ensure you don't miss any important due dates.
Reduce credit card balances
Relying on credit cards too much can have a negative impact on your credit score over time if you're not making your minimum repayments on time.
It's advisable to always make at least the minimum monthly repayment on your card to prevent it negatively affecting your credit score.
It can also help to keep your credit card balances low in relation to your overall credit limits. Keeping your levels of usage below 30% of your available credit is typically a good rule of thumb.
Pay off debt strategically
Instead of getting overwhelmed by the level of debt you’re carrying, it can be beneficial to focus on paying off existing debts systematically.
You could consider using the debt snowball or debt avalanche method, where you either prioritise paying off debts with the highest interest rates or the smallest balances initially.
Gradually reducing your overall debt burden can positively impact your credit score once you get going.
In addition, paying off balances systematically can help you see progress more clearly, motivating you to continue to your journey to a better financial standing.
Avoid new credit applications
Each time you apply for a new credit product, it generates a hard inquiry on your credit report. This function can temporarily lower your credit score.
Despite the fact that it may uptick again in a few months, this can be harmful if you get rejected for a loan and need to apply again.
For this reason, it can be best to limit new credit applications unless they’re absolutely necessary, as well as being selective about the credit you seek out.
Maintain a diverse credit mix
Having a mix of different types of credit under your belt, such as credit cards, instalment loans, and mortgages, can actually demonstrate your ability to manage different financial responsibilities.
This can be appealing to lenders as it shows you’re capable of managing debt effectively.
But it is advisable to only take on credit that you can handle responsibly to avoid falling into a cycle of debt.
Keep old accounts open
As well as having a diverse credit mix, having a few credit accounts open and untouched can help you on your way to a better credit score.
Closing old credit card accounts ultimately works to shorten your credit history and reduces the average age of your accounts, negatively impacting your credit score as lenders have less insight into your behaviour.
If the balance in your credit account is cleared, consider keeping it open, even if you don't use it at regular intervals.
Monitor your credit regularly
It can be beneficial to keep an eye on your credit rating over time. You can do this by checking your credit reports periodically for any changes or discrepancies you can identify.
You might also consider using credit monitoring services or credit score tracking tools to stay up to date and informed about any big changes to your credit profile.
How much can you borrow with a secured loan?
The amount you can borrow as a secured loan will depend on a number of factors, including:
The amount different providers will be willing to lend varies, but in general loans of anywhere from £10,000 upwards are common.
How much will a secured loan cost?
The main cost of a secured loan is the monthly repayments. These usually cover the interest on the loan and repaying a proportion of the capital. However, some lenders may offer the option of an interest-only loan where you repay the capital at the end of the loan term.
If you have bad credit, this is likely to affect the interest rate you are offered, but by taking out a secured loan you will normally get a better rate than you would with unsecured borrowing.
The main things which will affect your interest rate are:
-
How much you need to borrow
-
How long you want to repay over
-
Your loan-to-value ratio (LTV)
-
How much debt you already have
-
Your credit rating
Find the best interest rate on secured loans for bad credit
When looking for a secured loan, one of the main things to look for is the interest rate you will pay. Interest rates vary considerably between different loan providers and this can make a big difference to your monthly repayments and the total amount you end up repaying
The loan comparison table at the top of this page offers a fast, simple way to compare deals on secured loans from all the leading lenders. We regularly update this list with carefully selected loan deals that offer great value, allowing you to find a loan that matches your needs and finances.