Secured Loans for Bad Credit: Are They a Good Idea?

If you have poor credit but need money to cover expenses, consider secured loans. With a secured loan, you’ll need to own something of value to offer the lender as collateral. 

Here’s a closer look at secured loans for bad credit and how they work. 

What is a secured loan for bad credit and is it a good idea?

If you need to cover an expense but don’t have the funds on hand, a secured loan for bad credit may be a good option. This is particularly true if you’ve had trouble qualifying for unsecured loans because of your credit score. Just make sure you’re comfortable putting an asset on the line and feel confident you’ll be able to make your payments. 

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How do secured loans work?

Secured loans are backed by collateral, such as a house or car. When you apply for a secured loan, the lender will ask you what type of collateral you’d like to secure. The loan amount the lender offers is based on a percentage of the collateral item’s value.

If you default on your loan, the lender can seize your collateral and sell it to recover the outstanding balance. 

While a collateral loan requires you to put an asset on the line, it can help you get approved for a loan with favorable rates and terms, even if you have bad credit. 

Some common types of secured loans are: 

• Title Loan: A loan secured by a car, van, truck, recreational vehicle, or boat that you own free and clear.
• Pawn shop loan: A pawn shop loan is secured by miscellaneous collateral, such as jewelry, musical instruments, power tools, or electronics.
• Mortgage: A mortgage is a secured home loan that uses the home and property as collateral.
• Secured line of credit: This open-ended loan secured by a house or car allows the borrower to withdraw and repay funds as needed. 

Check your car’s value

Secured personal loans and your credit

There are a few ways secured loans can affect your credit. When you first apply for one, a lender will likely run a credit inquiry, which may or may not temporarily lower your score. But you can boost your credit if you’re approved by making consistent, on-time payments. 

Can you get a secured loan with bad credit?

Yes! Since collateral loans are less risky for lenders, they usually have less strict requirements. So, if you have bad credit, you may still qualify for a secured loan.

Because they’re backed by collateral, secured loans often have more relaxed credit score requirements than unsecured loans. Borrowers with credit scores as low as 580 can be approved for secured loans, though a score of 600 or higher may qualify them for better interest rates and terms. 

During the approval process, lenders will consider factors beyond your credit score, including your collateral, debt-to-income ratio, and employment status. 

How to apply for a secured loan if you have bad credit

1. Compare lenders 

Not all secured loans for bad credit are created equal. Shop around and explore your options. Compare interest rates, terms, fees, and perks to choose the right loan for your unique situation. 

2. Choose a secured loan option

Once you’ve done your research, decide on a secured loan. Ensure you can afford to repay the loan you choose, or risk losing your collateral. 

3. Gather the necessary documents

Collect the documents you’ll need for your application, such as government ID, pay information, proof of ownership of your collateral, or other documents regarding your collateral item.

4. Fill out an application

Next, fill out the application for a secured loan in-store or online from the comfort of your home. Before submitting your application, review it for accuracy to avoid delays with approval and funding.

5. Wait for approval

After you submit your application, you’ll need to wait for approval. Fortunately, many secured loan lenders offer quick approval decisions and may approve you instantly. You won’t have to wait days or weeks.

6. Receive your funds

You may receive your loan money via direct deposit, prepaid card, or check. Most lenders allow you to choose your preferred funding option, and you may receive funds the same day you apply or within 24 hours.

Secured loan for bad credit requirements

While every lender is different, many require the following when you apply for a personal loan with collateral:

• Collateral: This may be a house, car, savings account, piece of jewelry, or another valuable item.
• Government ID: Most lenders require one or two forms of ID, such as a driver’s license, passport, birth certificate, or Social Security card.
• Proof of income: Since lenders often have minimum income requirements, you may need to provide pay stubs, bank statements, and tax returns.
• Proof of address: A proof of address is a document that shows your full name and address, such as a utility bill, leave statement, or voter registration card. Some lenders may use it to verify your address. 

Pros and cons of a secured loan for bad credit

Pros

• Better approval odds: Secured loans often accept applicants with poor credit scores, providing greater access to funds for expenses like debt consolidation or medical bills.
• Lower interest rates: Collateral reduces lender risk, resulting in lower APRs and potentially longer repayment periods, which can make your monthly payments more affordable.
• Credit-building opportunity: Making on-time payments on a secured loan can boost your credit score by strengthening payment history and reducing credit utilization. This makes secured loans a great credit-building product. 

Cons 

• Risk of losing collateral: Missing payments can result in the pledged asset being repossessed or foreclosed.
• Potential deficiency balances: If you fail to make payments and your collateral is repossessed and sold for less than the outstanding balance, you may still owe the remaining balance and face collection actions.

Why choose Advance America loans for bad credit?

At Advance America, we don’t require collateral for our loans. We offer a variety of unsecured loans and work with borrowers with less-than-perfect credit. If approved, you could receive money the same day. 

Visit one of our 800+ local Advance America locations or start your online application to get started today.

Apply for a loan today

Sources

1. Federal Reserve: An Overview of Credit-Building Products

Trustpilot:Advance America Reviews