In this article, we’ll help you learn what secured personal loans are and how you can apply even if you have bad credit. By reading this page, you’d get to know what this loan type’s requirements are, its essential details like interest rates and repayment terms, and also if there’s a chance that you can qualify for one.
Regardless of whether you have bad credit or even no credit history at all, you might be able to qualify for a personal loan as long as you can provide the necessary collateral requirement. And this is because your collateral is your bank or credit union’s guarantee that they will not go empty-handed upon lending you money. For that reason, if you’re unable to fulfill loan payments, lenders will seize your collateral and possibly sell it to recoup its losses.
Secured loans are a way for banks or credit unions to remove the risk of lending money to someone who doesn’t have the most stellar credit score or history. This is an option you can consider, especially if you’re struggling to get approval on other credit types.
Of course, there are no guarantees. Even if you have something of value that qualifies as collateral, creditors will still need to look at the other details in your application, including your income and existing debt, to determine your creditworthiness. Nonetheless, the availability of collateral improves your chances of gaining approval.
Apart from having a good credit score and a low debt-to-income (DTI) ratio, you may need to provide some documentation for creditors to finalize your application. For instance, you may be asked to provide proof of identity, which can be your driver’s license, passport, Social Security Number (SSN), or Individual taxpayer identification number (ITIN).
Another documentation requirement is proof of address such as utility bills, lease contracts, voter’s registration card, etc. Proof of income is also needed, like bank statements and income tax returns, so creditors can verify what you earn. Also, with a bank statement, lenders can view what goes out from your balance, allowing them to understand if you still have enough funds to pay the loan you’re applying for from them.
These are all essential for any bank or credit union to check before they pre qualify you for a loan.
Now, before you even consider applying for a secured loan, it’ll be helpful to know its key aspects to help you shop around or even compare it with other loan types. Some these aspects include the following:
Interest Rate: The interest rate is, of course, what the bank or credit union earns from lending you money. And whether you’ll get a high or low rate will likewise depend on your credit score. However, borrowers will normally get a more favorable rate with collateral than compared to an unsecured loan.
APR: APR or Annual Percentage Rate is similar to interest rates except that it covers more than just the borrowing cost. APR may include other charges like discount points and loan origination fees. This helps in getting the overall picture of costs. APR for secured loans is still going to be much lower compared to loans without collateral.
Collateral: Collateral is not just any kind of asset that you can use to snag a loan. The acceptable form of collateral may depend on the lender. But some of the common ones are real estate properties, cash, certificates of deposit (CD), vehicles, stock holdings, mutual funds, and others. The best way for you to know which ones are accepted is to inquire directly to the lender.
Repayment terms: Repayment terms refer to the length of time you have to pay off the loan. The exact duration, however, will depend on your lender. There are lenders that offer a 1-year term length, while others may allow you to repay the entire amount for up to five.
The types of secured personal loans you can get are based on the type of collateral you apply as security for the borrowed sum. While it is mentioned that there are various types of collateral you can use, the two general ones: vehicle and property.
A car title loan or auto equity loan works with you borrowing an amount against the value of your vehicle. This is great for those with bad credit because it can provide much-needed cash immediately. However, car title loans usually don’t have the best terms. In fact, the amount you can borrow is sometimes just 25% to 50% of your vehicle’s appraised value.
And this is because lenders try to ensure that they get the most out of the deal if you default. Since the value of vehicles depreciates fast, lending only half or a quarter of its appraised worth offers lenders room to sell for a profit.
On the other hand, home equity loans allow you to borrow funds against the equity of your home, a.k.a., remortgaging. But before you apply for one, you should first have built substantial equity. This means that your home isn’t composed entirely of mortgages. Some creditors will let you borrow funds at 20% or 30% home equity.
The advantage of this secured loan type is it offers you a better shot at qualifying for a personal loan, and it also affords you a much higher amount than what you could get with an auto equity loan.
Of course, the obvious downside, if you can’t fulfill your obligation, is foreclosure.
Unlike with unsecured loans, where the loanable amounts depend solely on a combination of credit and non-credit factors, the exact amount you can get with secured loans has a lot to do with your collateral.
Yes, you will still need to have sufficient income and a not-too-high DTI ratio. But for the most part, what matters is the collateral you have as security. Car title loans, as touched on, are based on your vehicle’s value, while home equity loans are based on your home’s current value and your mortgage’s outstanding balance, i.e., your equity.
Then lenders will factor in your credit score to determine what amount they can lend you or sometimes if you’re even eligible or not. Often, those with a credit score below 620 may find it harder to get qualified, but that’s not to say that’s entirely impossible.
If you have bad credit, you can still get the funds you need as long as you don’t have a high DTI and if your home equity is at least 15%.
In the circumstances where you have a bad credit score but have an asset that you can collateralize, the best choice that offers a higher probability of approval is still a secured loan.
Not only that, but the terms and rates you can get are also favorable to you. And this goes back to the fundamental reason of the bank or credit union having some form of guarantee with your collateral.
However, if you’re stuck with only the unsecured loan option, the best thing you can do is to improve your credit score first. Try to borrow amounts that will not be too difficult for you to pay. And once you’ve built a decent score, you’ll find that you have better terms and loan types available to you.
Here are other tips to boost your credit score fast:
It largely depends on the bank or credit union, but it may take anywhere between three to six weeks, in most cases, to complete the entire process.
It may be difficult for you to get a personal loan with that kind of credit score, so the best thing to do as of the moment is to work on improving it to qualify for a loan eventually.
The main advantage of a secured loan to a borrower is that you can get a faster as well as a better chance of gaining approval. In addition to that, the terms and interest rates will not bleed you dry.
It can be easier to get as long as you have the asset that passes as collateral. Still, lenders will need to look at your credit score and history to make the overall determination.
The fastest way is always to pay your bills on time. This includes not just your credit cards or any other loans but also utility bills like your phone bills, rent, etc. This helps you build your case as a responsible payer, which can up your credit score dramatically.