There are various loan options to choose from when you need quick emergency cash with bad credit. You may find share secured loan options when searching for a loan. But what is a share-secured loan? Learn more about this financial option and how you can qualify today.
What Are the Two Main Types of Personal Loans?
You can get two basic types of loans: secured or unsecured. Suppose you’re searching for a loan option to help pay monthly bills or finance a large purchase. In that case, knowing the difference between unsecured and secured debt is beneficial.
Secured Loan
Secured loans require the borrower to use a valuable asset as collateral to obtain a loan. The type of collateral required depends on the lender and the loan you want to get. For example, auto loans require a car title, while home equity loans use the equity in your house. You may even be able to use land as collateral to get a construction loan!
A secured loan is ideal for individuals that have a bad credit history. Many people think that they’re ineligible for loans due to a low credit score. However, there are plenty of high-interest loans for bad credit available. Using collateral reduces the lender’s financial risk, which means you could get approval and better loan terms despite a low credit rating.
Unsecured Loan
An unsecured loan does not require the borrower to provide collateral. When you submit a loan application, the lender will make a qualifying decision based on your income and credit score. If your credit rating could use a boost, your unsecured loan options may be minimal. Lenders that don’t require collateral tend to have stricter qualification requirements. Loan offers with bad credit scores tend to come with higher interest rates and lower lump sums. The main benefit of unsecured loans is the low financial risk for borrowers, as there is a possibility of losing personal property.
What Are Share-Secured Loans?
A share-secured loan is a short-term borrowing option that requires a savings account as collateral. For example, you can use a certificate of deposit (CD) or money market account. As long as the savings account bears interest, you can use it to obtain a share-secured loan.
There are various terms lenders use to describe a shared secured loan, such as:
- Savings secured loan
- Cash secured loan
- Passbook loan
Since the financial risk is low, lenders that offer share-secured loans typically have flexible qualification requirements. In the event a borrower cannot continue making loan payments, the lender can seize the savings account to reclaim the unpaid principal balance. This risk mitigation can help a person with a bad credit score quickly get a sizable emergency loan.
The amount of money required to be in the savings account depends on the financial institution you work with. However, most lenders will only offer a loan amount equal to or less than your total savings account balance.
Pros and Cons of a Share-Secured Loan
There are pros and cons to every loan option. If you are debating whether to apply for share-secured loans, read about some advantages and disadvantages before making a final decision.
Pros of Share-Secured Loans
Simple Qualification Requirements
The qualification requirements for share-secured loans are typically easier to meet for many prospective borrowers. Using collateral incentivizes the lender to extend loan approval to more people who would not usually qualify for emergency funding. Most financial institutions only work with borrowers with a good credit rating or higher. With secured loans, you can access fast money despite a bad credit score.
Build Credit
If you are still working on building credit, know that you can boost your score over time with a share-secured loan. By making continuous loan payments on time, your credit score will eventually increase! Your payment history is the most important factor for credit score calculation, accounting for 35% of your score. A higher credit score can help you obtain better loan offers, lower insurance rates, more housing opportunities, and much more.
Cons of Share-Secured Loans
Loan Amount
One of the main disadvantages of a shared secured loan is the loan amount. The amount of money you can borrow is entirely dependent on how much you have available in a savings account. If you need a $2,000 loan for car repairs, $1,200 is the maximum you will receive if that’s how much you have saved. Low loan amounts can be incredibly inconvenient when you need a large loan to meet upcoming financial deadlines.
Financial Risk
There is a high financial risk for borrowers that take out a share-secured loan. Secured loans are riskier than unsecured loans because you can lose your asset. Your financial circumstances can change without notice, which can cause you to fall behind on loan payments. When a delinquent account defaults, you can lose all the money in your savings account! If you used a significant amount as collateral to get a loan, you could end up worse off than before you took out the loan.
Alternative Loan Options for Share-Secured Loans
While a share secured loan can provide bed credit borrowers with fast cash, alternative options exist. You may be able to get more money and longer repayment terms with other types of loans. Read about different types of loans below.
Home Equity Loans
A home equity loan is a loan option available to homeowners. Home equity loans are You can use the equity in your house to obtain a significant loan amount in a few weeks. Since real estate is worth a lot of money, you can potentially get thousands of dollars for emergency expenses. The downside is that you must use the property as collateral, and the approval process can take up to a month! The lender will require an appraisal to verify your home’s market value, which slows down the approval process.
Personal Loans
A personal loan can help you get money in as little as one business day. Eligible borrowers can get the cash they need without using collateral to secure the loan. While most people get personal loans from a bank or credit union, you can find plenty of online lenders. Online loans with monthly online loans allow you to avoid unnecessary travel and speed up the approval process. Qualification for unsecured personal loans depends on your credit score and income. Still, many lenders extend approval to bad credit borrowers. If you have bad credit, rest easy knowing there are personal loans for credit scores under 600!
Auto Title Loans
Auto title loans, or auto equity loans, are a secured loan option for people that need a lot of money quickly. Borrowers can use their car title as collateral to get a few thousand dollars for bills and expenses. The loan amount you can receive depends on your car’s equity, not your credit score. However, interest rates can be very high with auto title loans, and you must risk losing your vehicle to get funding. Some lenders also require borrowers to park their cars at a secure lot for the duration of the repayment term. If you only have one vehicle, this can make commuting extra challenging.
How To Improve Your Credit Score
Building credit can help you get better financial opportunities and low-cost repayment terms. If you currently have a low credit score, know there are various ways to increase your credit over time. All you need is a little dedication!
Pay Bills on Time
Avoiding late monthly payments is the best way to improve your low credit score! A steady history of on-time payments proves that you are a responsible borrower and can successfully manage your financial accounts. Continuous on-time payments can help your credit and access better repayment terms.
Reduce Your Credit Utilization
Credit utilization is the amount of credit you use compared to your credit limit. Maxing out your credit cards can negatively impact your credit score. High credit card balances tell a lender that you have trouble managing your personal finances. Paying down your credit card debt can significantly improve your credit utilization ratio, which should not be higher than 30%.
Limit Credit Inquiries
Making too many credit inquiries can decrease your credit score. The lender will conduct a hard credit check when you submit a loan application. Hard inquiries lower your credit by as much as five points. If you need a loan, avoid inquiring more than six times within a year. More than six inquiries can significantly decrease your credit score and limit your financial options.
Review Your Credit Reports
Unfortunately, it is not uncommon for borrowers to have incorrect information on their credit reports. Each of the three major credit bureaus provides one free credit report annually. Ensure you take advantage to check for errors. Incorrect information can negatively impact your score. You can file a dispute through the corresponding credit bureau website if you notice a mistake.
The Bottom Line
When you need money quickly, you may lean towards secured loans if you have a low credit score. Secured loans, such as share secured loans, typically have fewer qualification requirements. Flexible requirements allow more people to qualify for fast emergency money!
Unfortunately, share-secured loans require using an interest-bearing savings account as collateral. The amount you can borrow is limited to the amount you have available in that savings account. And if you fall behind on your loan payments due to an unforeseen event, you can lose your savings!
If you need money now, consider alternative loan options! Even with bad credit, you can still qualify for unsecured loans if you have adequate proof of repayment. Weigh all your options before signing on the dotted line of a loan agreement!
References:
Everything You Need To Know About Share-Secured Loans│Forbes
