Best secured loans for bad credit

What is a bad credit secured loan?

A bad credit secured loan is simply a secured loan specifically designed for people with poor, or bad, credit histories.

Whether you’ve missed payments in the past, defaulted on a loan, or have an individual voluntary arrangement (IVA) or county court judgement (CCJ), a secured loan could help pay for home improvements or consolidate debt, for example. However, it’s important to think carefully before applying for a secured loan, particularly for debt consolidation, as it may not be the best option for everyone.

Secured loans for bad credit work in the same way as a standard secured loan, as the borrower puts forward an item of value (typically their home or another property) as collateral, or security, for the amount they want to borrow.

You then need to repay the agreed sum each month for the specified term. Assuming you repay the loan in full and on-time, your property won’t be at risk.

In addition to your credit history, secured lenders will also look at your income and expenditure and the item put forward as security to make a decision on your application. These factors will also help to determine the amount you can borrow and the interest charged.

Secured loans can be appealing for those with bad credit as lenders may be more likely to accept their application and offer lower interest rates than if they applied for an unsecured loan. This is because the collateral reduces the risk to the lender as they are entitled to repossess the property if the borrower misses payments and defaults on the loan.

Risks of a secured loan with bad credit

Secured loans can come with a significant amount of risk, particularly for those with bad credit histories.

If you don’t manage to keep up with your secured loan repayments, the lender could repossess the item used as security. If you used your home as security, as many borrowers do, this means you could lose the roof over your head.

Additionally, missed payments could cause your credit score to drop further and make it even more difficult to access affordable credit in the future.

Individuals with bad credit are likely to have experienced difficulties in managing debt and making payments in the past, which means applying for a secured loan isn’t a decision to be taken lightly. Especially if you’re already paying off a certain amount of debt, taking out a secured loan could worsen your situation instead of helping it.

If you’ve considered the risks and decide that a secured loan is still right for you, only borrow what you need and make sure you can comfortably afford the repayments, even if your financial situation changes.

It’s also worth looking at the length of the repayment term if you take out a secured loan. While a longer term means your monthly payments may be smaller, you would end up paying more in interest and it would cost you more overall.

Improving your credit score

Instead of taking out a secured loan, individuals with bad credit may be better off improving their credit score.

A better credit history could improve your chances of getting approved for credit, as well as helping you to access more competitive rates of interest.

Although there’s no quick fix to getting a good or excellent credit score, there are several ways you can start to improve your credit history, including:

• Making payments in full and on-time on your existing credit commitments.
• Only using up to 30% of your available credit.
• Not applying for credit too often.
• Signing up for credit builder schemes, such as Experian Boost, Canopy or CreditLadder.

It’s a good idea to check your credit score with all three main credit reference agencies (Experian, Equifax, TransUnion) on a regular basis. This can help you to keep track of your progress and flag any errors or mistakes that may drag your score down.

See more tips on how to improve your credit score.