Can You Get a Secured Loan with Bad Credit?

Yes, you may be able to get a secured loan with bad credit. However, be aware that secured personal loans for low credit scores often come with very high interest rates, low loan amounts, and extremely brief repayment terms. Because of these factors, bad credit secured loans are often considered high-risk funding. According to Experian, Americans owe approximately $342.1 billion in secured personal loan debt.¹ 

What is a Secured Loan?

A secured loan is a type of personal loan that requires collateral. The purpose of the collateral is to serve as a form of income that can cover the funding amount should the borrower become unable to repay their balance on their own. Since collateral essentially replaces traditional income when it comes to approval, lenders of secured loans are typically able to allow consumers to borrow money even if they have a low credit score or a poor credit history.

What Can You Use As Collateral for a Loan?

Just about anything with equity can be used as collateral. Some common assets borrowers use to secure funding include: 

• Cars (for auto loans or car title loans)
• Cash (savings accounts, CDs, etc.)
• Homes (for home equity loans or lines of credit) 
• Boats
• Stocks or bonds
• Insurance policies 
• Jewelry, art, antiques, collectibles, precious metals, etc.

The Pros and Cons of Secured Loans for Bad Credit

Before taking out any kind of funding, it’s important to consider the advantages as well as the risks of borrowing. Bad credit loans have the potential to improve or severely damage the borrower’s credit, so handling your loan responsibly is essential. 

Pros

A few advantages of using secured loans for borrowers with bad credit include: 

• Lower interest rates: Since there is collateral to lower the lending risk, lenders are usually more willing to offer low rates to borrowers on secured loans. 
• Larger loan amounts: Depending on the equity in the collateral, funding amounts for secured loans can be higher than other bad credit alternatives. 
• Longer repayment terms: Lenders may grant longer repayment periods, especially when compared to other bad credit loans like payday loans. 
• Builds credit: Just like any loan, borrowers can work towards improving their credit when they make consistent and on-time payments. 

Cons

Some of the risks borrowers take on when they get a secured loan are: 

• Risk of losing collateral: Borrowers who miss a certain amount of payments or default on their loan risk repossession of whatever asset they used as collateral. 
• Longer commitment: While longer repayment terms can be nice, they also extend the life of the loan, which can also make it more expensive. 
• Fees and penalties: Lenders may penalize borrowers who try to pay off their balances early or require balloon payments. 
• Less flexibility: Borrowers may have fewer options when it comes to restructuring their loans to make them more affordable. 
• Risk of over-borrowing: Collateral with high equity may qualify certain borrowers for higher loan amounts than they may be able to afford. 

Types of Secured Personal Loans 

Some common types of secured loans available for consumers who may not have the best credit scores include car title loans, home equity loans, and more. 

Car Title Loans

Car title loans are a type of funding where the borrower uses their vehicle title as collateral. When a consumer gets a title loan, the lender will sign onto the vehicle title as a lienholder, giving them partial ownership of the vehicle for the duration of the loan terms. If the borrower fails to repay their title loan, the lender then has the right to repossess their vehicle.

Home Equity Loans

Home equity loans are secured loans where the borrower uses their home or real estate property as collateral. Home equity loans may be out of reach for some bad credit borrowers since it’s required that the borrower own their home. Therefore, renters wouldn’t be able to utilize a home equity loan or a home equity line of credit. 

Mortgage Loans

A mortgage loan is a type of funding borrowers can use to purchase a home. Interest rates on mortgages are highly dependent on the current state of the market as well as the financial history of the borrower. Mortgages also have long repayment terms that can last 30 years or more.  

Business Loans

Business loans are secured loans used for business-specific purposes, like payroll, new equipment, building maintenance, etc. Collateral for business loans typically includes equipment, property, inventory, or cash. Since business collateral usually contains quite a bit of equity, business loans may come with lower interest rates and longer repayment terms. 

401(k) Loans

401(k) loans are a way to borrow money from your retirement savings account. People who borrow money from their 401(k) accounts must repay their balance, plus interest and fees, within a set time frame or face tax consequences. Borrowers who fail to pay back their 401(k) loans will have to claim the unpaid amount as income on their next tax return. 

Credit Score Requirements for Secured Loans 

Typically, there is no minimum credit score requirement borrowers must meet in order to be approved for a secured loan. Lenders usually care more about the equity in the collateral over the borrower’s income or credit history. This is why borrowers with a poor credit score often seek out secured loans. However, just like with any other type of funding, it is important to research your options, consider alternatives, and establish a financial plan before filling out an application. 

Some non-loan alternatives bad credit consumers may want to consider are: 

• Using funds from a savings account
• Asking a close friend or family member to lend you some money temporarily 
• Getting a temporary part-time job to earn additional income 
• Have a garage sale to get some extra cash

Alternatives to Secured Loans When You Have Bad Credit

As an alternative to secured personal loans, there are also unsecured personal loans for bad credit. An unsecured personal loan is a kind of funding that uses the borrower’s income, and financial history to determine approval. 

While some lenders require higher credit scores, there are also lenders who specialize in unsecured personal loans for bad credit. Keep in mind that this type of funding may still come with lower loan amounts, higher rates, and shorter terms. But, as you work towards improving your credit, you should be able to qualify for better deals!

Borrowers may seek out unsecured loans via financial institutions like a: 

• Direct lender
• Credit union
• Bank

Head over to the CreditNinja dojo to learn more about getting a bad credit personal loan, handling monthly payments, and more! 

References: 
1. The Average Personal Loan Balance Rose 7% in 2022 | Experian