Best secured loans for bad credit

There are many reasons you may be considering a secured loan if you’ve got bad credit, but one of the most common is to consolidate existing debts. Struggling under the weight of unsecured debt could be why your credit rating took a downturn in the first place, particularly if your repayments have become unmanageable, but consolidating them all into a single loan could dramatically reduce your monthly repayments and could mean you’re able to save a considerable amount over the term, and with only one loan to worry about it could be far easier to manage, too.

Of course, there may be other reasons you’re looking for a secured loan, such as buying a new car or making home improvements, and considering secured loans can often come with lower rates than their unsecured counterparts, it could be a wise choice. One of the advantages is that, unlike with a credit card for example, you make set repayments each month and the loan is completely repaid at the end of the term, and those monthly repayments can often be more affordable as the loan can be repaid over a longer period. And, as long as you keep up with those repayments, you could steadily build your credit rating in the process.

Yes. Because you’re offering your property (or another asset) as collateral, the risk to the lender is lower, and therefore you’re more likely to be approved for a secured loan with bad credit than if you applied for other kinds of finance. However, you’ll still need to make sure you can afford the repayments, and it could be a little more difficult to track down the right deals. You’ll still be subject to affordability checks from the lender, too, and will need to give them proof of your income, outgoings and any other debt you have for them to make a decision. Typically speaking, the lower your credit score the less favourable the terms are likely to be – which usually means you’ll have to pay a higher interest rate – but it could still be possible to get a secured loan with bad credit.

Your credit score will be important for any loan application, though as discussed, a bad score won’t have as much of a detrimental impact if you’re applying for a secured loan than for unsecured forms of credit, for the simple reason that the lender has security in the form of your property. Instead, the main difference a poor credit score can make will be in terms of the interest rate you’re offered, with a lower score typically resulting in higher rates. This is why it’s often best to focus on improving your credit score before applying for finance, but the fact that loans can be available anyway is nonetheless reassuring.

Being refused for an unsecured loan doesn’t necessarily mean that you’ll be turned down for a secured loan too, but the previous refusal could have a negative impact on your credit score. That said, as mentioned above, a bad score doesn’t mean you won’t be approved; it could simply result in a higher interest rate. Secured loan providers are generally more lenient than their unsecured counterparts as the products on offer are very different – unsecured lenders have to take your word that you’ll repay the loan, whereas secured lenders have security and will able to repossess your home if you’re unable to pay – so if you’ve been refused an unsecured loan, don’t let it put you off applying elsewhere.

The main risk is that of defaulting on your loan, particularly if you’re already struggling with your finances. And, given that your home will likely have been used as collateral, there’s the subsequent risk of your creditors seizing it if you’re unable to pay. Defaulting will also result in a huge black mark on your credit report, which will drag your score down further and could make it even more difficult for you to access credit in the future.

It’s important to consider the terms you’re agreeing to as well. Even though secured loans tend to come with lower rates and longer terms than their unsecured counterparts – which means repayments can be lower – make sure to consider how long you’ll be paying the loan back for, particularly if you’re consolidating. If you opt for a longer term than the original debt you could end up spending a lot in interest and it may cost you more overall, and similarly, if you’ve got a particularly poor credit score and are charged a higher rate, the amount of interest you’ll have to pay could be significant.

As with most forms of credit, the higher your credit score, the lower the interest rate is likely to be, and vice versa. The same applies when it comes to secured loans. Lenders will take other factors into account when deciding your terms (such as the amount of equity in your home, your income and any outstanding debts), but your credit history will be a significant factor, so if you want to be offered the best rates and most favourable terms, it could be worth trying to improve your score before applying.

It’s a very personal decision, and just because you technically can get a secured loan with bad credit, it doesn’t mean you necessarily should. It’s important to carefully consider your options before you take the plunge, making sure to bear in mind your financial health and the potential consequences of being unable to repay the loan, and it’s often worth speaking to the experts who will be able to help. Contact our secured loan broker partner Loans Warehouse to discuss your options and, if you decide to go down the secured loans route, they’ll be able to help you find the best possible deal for your circumstances.