If you have a good credit history, it’s easy to get a loan. Lenders trust you’ll pay it back completely and on time. For individuals with poor credit, though, obtaining a loan can be difficult, if not impossible.
Bad credit isn’t something that affects just a few people. It’s easy to make a few late payments or miss them altogether, and then your credit rating starts to drop. In fact, about one in five people are denied their credit card or loan applications because of bad credit.
Maybe you have a poor credit history but need a quick infusion of cash for an emergency. Are there any loans out there for you?
Secured loans for bad credit are one option. Below you’ll learn everything you need to know about them. Then you can decide if they’re right for your situation. Read on!
What is a Secured Loan?
Loans are either unsecured or secured. Most lenders offer the first kind. They issue them based on these factors:
- Financial history
- Credit score
- Existing debts
As you can see, individuals with poor credit history are unlikely to get an unsecured loan. In addition to their bad credit, they are often struggling financially, which is why they need a loan in the first place!
A secured loan, on the other hand, is possible, even with bad credit. That’s because the borrower can offer something as collateral. This added security reduces the lender’s risk, and they are more likely to offer a loan, even with bad credit.
What can you use as collateral for a secured loan? Borrowers typically offer their homes or their cars.
Yet, anything can serve as collateral. Money in your savings account, expensive jewellery, or a fine wine collection are all options here.
This reduced risk confers several advantages on secured loans. They usually have lower interest rates, higher borrowing limits, and longer repayment periods. What’s more, if you make the payments regularly and on time, you can build up your credit history again.
On the other hand, if you default on the loan, the lender can seize your home, car, or fine wine collection. Think carefully, then, before accepting a secured loan against your home or other valuable possession.
In the next few sections, let’s go over some of the more common types of secured loans.
Some Long-Term Loans for Bad Credit
1. Bad Credit Secured Homeowner Loan
This is a long-term loan for bad credit. It allows you to borrow a set amount of money based on your home’s equity and the following additional factors:
- Value of your home
- Employment status
- Income and expenditure
- Credit history (especially if there are any truly outstanding issues)
In return, the lender gets to take a legal ‘charge’ over your property. As mentioned above, this is risky because you could lose your home if you default on your payments.
A bad credit secured homeowner loan can be used for just about anything, though. Some examples are home improvement, a new car, or a holiday. Repaying your loan in a timely manner will, of course, rebuild your credit.
2. Logbook Loan
A logbook loan is similar to a homeowner loan, except instead of using your property as collateral, you use your vehicle. Cars, vans, or motorbikes are all acceptable.
This bad credit instalment loan generally runs for 78 weeks, although legally you are allowed to repay the loan early if you can afford it.
During the repayment period, the lender owns your vehicle. They take control of your logbook and any other ownership documents. The lender lets you use the vehicle, though, and you become the owner again once you pay the loan in full.
Unfortunately, if you default on the loan, the lender keeps your vehicle and most likely sells it. Another disadvantage of a logbook loan is the extremely high Annual Percentage Rates (ARP’s). They generally run 400% and above, which makes logbook loans quite costly.
But, like other secured loans, they allow you to rebuild your credit history.
3. Savings Secured Loan
Sometimes lenders will let you use your savings account or stocks as collateral for a secured loan. If you are liquidating these accounts to pay off debt, it might be a good idea to use your savings instead of taking out another loan.
On the other hand, making regular loan payments will help build up your credit score, and when the loan is paid off, you’ll still have your savings or stocks.
In the rest of this article, let’s look at the pros and cons of unsecured loans in general.
What Are Benefits and Drawbacks of Secured Loans?
Subprime loans, especially those that are secured, are generally easier to obtain than unsecured loans. If you have good credit, an unsecured loan will be less expensive.
With poor credit, it might be your only choice.
Secured loans also let you borrow more money. For example, the maximum amount you can borrow with an unsecured loan is 35,000 pounds. For secured loans, you can get up to 75,000.
Finally, secured loans tend to have longer repayment periods. In fact, secured lenders prefer longer-lasting loans because set-up costs are high. Repayment periods are generally five to 20 years. With unsecured loans, they last from only one to seven years.
Monthly payments are therefore lower. As you might have guessed, though, you could end up paying more over the long-term.
In fact, while it’s tempting to pick the longest repayment period possible, that might not be the wisest economic choice. Paying more each month means you’ll pay less money overall. Think carefully, then, before signing anything.
What’s more, unsecured loans have fixed interest rates. Secured loans may not. Before signing any agreement, take note of the beginning interest rate. See if it changes. Then make sure you can still handle the monthly payments.
Finally, using your home or your car as collateral brings great benefits but also a tremendous risk. Before signing on the dotted line, ask yourself if you’re willing to lose these things. Make sure the risk is worth it.
Conclusion: Secured Loans for Bad Credit
There are many different kinds of loans borrowers can apply for. Secured loans for bad credit are one option if you have a poor credit history.
If you are facing an emergency or crisis and need an emergency infusion of cash, they could be the right fit for you! Perhaps you are facing such a situation right now. If so, we can help.
We’ll provide you with sound financial advice and get you the best offers for the financial services you are looking for.
Why not contact us today? We’d love to hear from you!