How much will a secured loan improve my credit score? This is an interesting question that many of our readers have been asking. 

We’ve answered this question and related secured loan and credit score questions below! 

What is a secured loan?

A secured loan is a type of loan where the borrower lists an asset as collateral within the credit agreement. The opposite of this is an unsecured loan, which does not include any asset as security in the agreement. 

What does this mean in practice? Well, the asset can be repossessed by the lender and sold to recover the debt if it goes unpaid. Common reasons for not keeping up with loan payments include lost employment and the accumulation of debts elsewhere that make the repayments unaffordable. 

These assets make it easier for the lender to recover arrears if you stopped repaying, and consequently, you are not seen as much of a lending risk compared to when taking out unsecured debt (most of the time). This could open the door to increased borrowing with competitive interest rates. 

If you cannot afford to repay, you may want to consider debt solutions

The asset will not be taken and sold if the borrower pays what they owe every month for the agreed period. You might be able to pay the loan off early, but this can incur an early repayment charge. 

If you do decide to borrow money in this way, make sure to only consider loans from companies that are authorised and regulated by the Financial Conduct Authority. 

Examples of secured loans

Some secured loans can be used for any purpose, while others might need to be used for specific purposes. Additionally, these loans can be secured against different types of assets whereas others may have to be secured against a specific asset, such as a car or home equity. Here are some examples:

  1. Home equity loan – borrowed against home equity
  2. Secured debt consolidation loan – can usually be borrowed against different assets but must be used to consolidate debts
  3. Secured home improvement loan – as above but must be used to improve the homeowner’s property

What credit score is needed for a secured loan?

When you apply for secured credit, the lender will want to check your credit score to see how you have managed your finances in the past, including other loan repayments. There is no fixed credit score that you must have to be approved across all loan providers. Instead, each lender can make their own determination on your application. But to get the lowest interest rates, you should aim to have a good or excellent credit score rating. 

Your credit score is not the only aspect of an application that will influence the lender’s decision. A big part of their decision is based on the affordability check, which is an assessment of your income and ongoing debts to make sure the projected loan repayments would not cause you financial distress. 

To make sure payments are comfortable, they will want to see that you do not need to use more than a specific percentage of your income on all debts, leaving you enough for essential living costs. 

But just like there is no fixed credit score required, there is no maximum percentage of your income that can be used for debts across all lenders. They apply independent assessments to check if you can afford to repay comfortably. It is suggested that all debts be at least less than 40% of income. 

Will a secured loan affect my credit score?

Taking out secured credit can affect your credit score to some degree. This is because the lender has to do a more sophisticated search known as a hard search. But applying for secured debt in isolation will not cause significant damage.  

Applying to too many lenders at once or in a short space of time causes each lender to complete a hard search. These types of searches leave a mark on your credit report, and too many of these can stop you from being approved for credit. This is why you shouldn’t keep applying to different lenders erratically. 

Do loan repayments improve your credit score?

If you continually make monthly payments on a loan in full and on time, this can increase your credit score. You are proving that you are handling your personal finances effectively and are able to meet the agreements of your credit agreement. 

This is why some people take out 0% credit cards even when they don’t need the credit. They use them to build their credit score to help them take out a car loan or mortgage in the future. 

Can a secured loan help build my credit score?

If making payments on a loan can improve your credit score, so can making full and timely repayments on secured loans. 

However, it is not a wise idea to take out secured credit just for the purpose of improving your credit score. Doing so would open you up to unnecessary risk and there are more effective ways of borrowing for the purpose of building your credit score, such as the 0% credit card method mentioned above. You can even build your score without having to borrow money at all. 

How much does a loan boost your score?

Making regular payments on any loan can boost your score, but the difference it will make to your score is dependent on personal circumstances, such as the size of your loan repayments, how long repayments last and other factors. 

It can be frustrating to not have an exact answer, but rest assured that making monthly payments as agreed will be benefiting your score. 

It should also be noted that having a variety of credit rather than just credit cards or just loans can be beneficial to your credit report. 

Are secured loans a good idea?

Secured loans can be a good idea if you need to borrow more money than what is available through unsecured credit and you want a competitive interest rate to boot. 

However, there is always an element of risk when using secured loans. You can mitigate this risk by not overborrowing, which may involve deciding to save more before you take out a secured loan, so the loan amount required is smaller. 

As mentioned at the start of our guide, remember to only consider legal lenders that are authorised and regulated by the Financial Conduct Authority. 

Is a secured loan a good idea if I have bad credit?

Secured credit might be a good idea if you have a bad credit history. Those with a poor credit score can find it difficult to be approved for an unsecured loan, and even if they are approved, they may only be offered a much higher rate of interest. 

Choosing secured credit with a low credit score may overcome some of these issues. Because the loan is secured, you’re viewed as less of a lending risk and any arrears could be recovered easier. 

As a result, you may be able to get approved for secured credit when you would have been rejected for an unsecured loan or credit card. Moreover, you may be able to access a lower interest rate with secured credit in comparison. 

However, this will all depend on personal circumstances and the severity of your bad credit history.  

More secured credit guides for FREE!

If you’re still considering secured credit or want to know more about credit scores, check back in with MoneyNerd again soon. Scores of new articles have just landed on our site with clear information on related topics.

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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