Have you been searching for secured loans? Bad credit going to hold you back? 

You may be surprised to hear that secured loans can still be an option with an unsatisfactory credit score, especially secured loans advertised to people with bad credit. 

In this post, we explain all there is to know about secured loans with a look at them from the perspective of bad credit. 

What is a secured loan?

A secured loan is the name for a group of loans that list an asset as collateral in the credit agreement. What does this mean? It means you are using an asset to secure the loan and give permission for the asset to be repossessed and sold if you do not stick to the monthly payments.

You should think carefully before securing debts against your home or any other asset. Moreover, only consider taking out a secured loan from a UK lender that is authorised and regulated by the Financial Conduct Authority. 

How does a secured loan work?

Most secured loans provide the borrower with a lump sum payment which is repaid over so many months or years through monthly repayments. These monthly repayments consist of a repayment on the capital loan amount and interest. 

There are some secured loans that may provide credit over a draw period rather than a lump sum. These may also have different types of repayment terms. One example is a home equity line of credit (HELOC). 

In either case, if you do not keep up repayments as agreed, the asset you listed as security may be repossessed and sold to raise money to clear the debt. For generic secured personal loans this process is quite simple, but if you have other debts tied to the same asset then things can get complicated. 

For example, you might have a mortgage on a house and have borrowed against your home equity. If you do not keep up repayments on a mortgage or the home equity loan, the home may be repossessed, sold and the money used to pay back both lenders – if possible. 

But of course, if you keep up with repayments as agreed and clear the loan in full, the lender will never be able to seize your asset. On the contrary, if you decide to pay it back earlier than agreed, you may face early repayment charges. 

Secured loans vs unsecured loans

Secured loans are different to unsecured loans, which as the name suggests, do not list an asset as collateral within the credit agreement. Therefore, if you have multiple missed repayments on an unsecured loan, the lender cannot automatically come and take one of your assets to sell and recover the arrears. 

If you miss multiple repayments on an unsecured loan, the lender can chase you for the money and add defaults to your credit history, which can stop you from being approved for further loans and credit cards. 

If you continue to refuse to play or do not come up with a debt solution, the lender can go to court and ask a judge to order you to pay. If there is still no resolution, the judge can allow enforcement action, including the possibility of using bailiffs to repossess assets and sell them.

Thus, even though unsecured loans do not use assets as collateral, debt chasing can still get to this stage through the courts. 

Where can I get a secured loan?

You can find secured loans with banks, online-only banks, building societies and loan lenders. Some types of secured loans, such as a second charge mortgage will be available with specialist mortgage lenders as well as high-street banks. 

You might want support searching the market. You could use a loan comparison website or you could pay for professional services to help you compare secured loans. 

Does a secured loan affect your credit score?

Unless you apply for many secured loans at once, applying for and taking out one of these loans will not have a negative effect on your credit rating. Your credit rating will only be damaged if you fail to make repayments on your personal loan as agreed or do not repay the full loan amount. 

In fact, quite the opposite is true. Taking out any loan and making repayment on time can improve your credit rating. It shows that you can manage finances and debt repayments effectively, increasing the likelihood of being approved for other loans and credit cards in the future. 

Can you get turned down for a secured loan?

You can be rejected for a secure loan if you do not meet the lender’s affordability checks or because you have a bad credit history. People with poor credit history may still be able to get a secured loan with some lenders even offering secured loans for bad credit. 

Naturally, you will not be able to take out a secured loan without an asset to list as collateral or without a relevant asset. For example, a home equity loan requires the applicant to have sufficient home equity. 

Do secured loans require a credit score check?

When you apply for any type of loan, legitimate lenders always carry out a credit score assessment. They will look at your score along with your credit history to get a full picture of how you have handled your finances and debt repayments. 

There is no fixed credit score that you require to be approved by any lender. Each lender can set different benchmarks for approval, but they’ll also need to consider wider factors, not least an affordability check. 

Affordability checks

Affordability checks are in place to make sure you can comfortably afford the loan you wish to take out. These tests take into consideration the applicant’s income and any existing debts, such as a mortgage or an ongoing loan elsewhere. 

The lender will want to know what percentage of the applicant’s income can cover all existing debt and the proposed secured loan repayments. It is not just a matter of having greater income than debt because the lender wants to make sure you can comfortably afford all other essential living expenses. 

Can I get a secured loan with bad credit?

If you prove you can afford the loan comfortably, the lender may still approve your loan even if you have bad credit. Having bad credit can make you a greater lending risk in the eyes of the lender, but they’ll consider all components of your application before making a decision. 

That being said, if your credit score is too low the lender may still reject your offer even when you can afford the loan repayments. Or they might offer a loan with much higher interest. It all comes down to personal circumstances. 

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What are secured loans bad credit?

A handful of lenders advertise a secured loan for bad credit, meaning these loans are specifically open to those without a perfect credit history. It is assumed you are more likely to be accepted for a bad credit secured loan over other secured loans – but this isn’t always true. 

Bad credit loans are gaining popularity among lenders, which is driving up competition and making interest rates more competitive. Thus, you may still find a competitive interest rate when searching through bad credit loans, which may not have been the case previously. Loans marketed for those with bad credit were once known to have extremely high-interest rates. 

Where can I get a secured loan with bad credit?

As mentioned earlier, opting for a secured loan with bad credit rather than an unsecured loan reduces your perceived lending risk and can help you get approved. You could get approval from any of the well-known secured loan lenders, such as high-street banks. 

However, if you are specifically looking to apply for bad credit secured loans, you’ll probably have to skip the big banks and look online. Secured loans for bad credit are typically advertised by online lenders online. Start by searching for these terms online to see what you find. 

Why do people get a secured loan?

People usually consider a secured loan because these loans typically allow individuals to borrow more. With an asset as security, the loan may be of greater value than an unsecured loan, typically capped around £25,000 with most lenders. 

Some secured loans borrowed against property or home equity can get you a loan in excess of £100,000. And to top it off, you might get a lower interest rate, although this depends on credit history and personal finances. 

Needing a larger amount of credit may be because you want to complete home improvement or renovations, which is one of the most common reasons to take out a secured loan. 

Another reason to consider a secured loan is if you have poor credit. Those with a poor credit history. If your bad credit score prevents you from getting an unsecured loan, a secured loan could reduce your lending and get the approval you need. This is not guaranteed but it is possible. 

Can you get a secured loan against your house with bad credit?

There are many types of secured loans that use property and property equity as collateral within the credit agreement. The most obvious examples are first charge mortgages, second charge mortgages and secured homeowner loans that are usually taken out to complete home improvements. 

Borrowing against your house or home equity is still possible with bad credit. The fact you’re willing to secure the loan with such a valuable asset will reduce perceived lending risk. However, those doing so may still have to pay higher interest compared to securing a loan against your home with good or excellent credit. 

If your credit score is too low, the lender may reject your secured homeowner loan for your own safety. 

What documents do I need to be approved for a homeowner loan?

To get approved for a secured homeowner loan you will need to provide documentation that:

  1. Proves your identity, such as a driving license and passport
  2. Proves you own the property, such as mortgage payments or property deeds
  3. Proves your income, such as regular and updated payslips
  4. Proves your employment status, such as an employment contract
  5. Proves existing debts, such as credit agreements

These documents are the foundations of any homeowner loan application. You may be asked for other or related documentation as part of the process. Providing these documents allows your application to be assessed and decided on, but they do not guarantee approval. 

More on bad credit secured loans 

For further information and support on secured loans with bad credit, read our related guides on MoneyNerd. We’ve discussed much more about having a poor credit score and how to improve your credit score. Uncover top tips and hints today! 

And if you’re still dealing with arrears that reduced your credit rating in the first place, consider speaking with a charity like Step Change for personalised help. 

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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