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How A Secured Loan Can Help You If You Have Bad Credit
●May 13, 2021●4 minute read
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Securing finance with bad credit can often be difficult. Traditional lenders, such as banks and credit unions, usually have strict credit requirements that exclude applicants with a low credit score. However, secured loans can be helpful for people with bad credit as it provides extra security for the lender.
This simple guide outlines what a secured loan is, how it can help if you have bad credit, and more.
What is a secured loan?
A secured loan is a type of loan in which the borrower offers an asset as collateral to provide security for the lender. This means that if the borrower was unable to make their repayments to pay off their loan, the lender could repossess the asset. It is then typically sold to cover their losses.
There are multiple types of secured loans but the most common secured loans are personal loans, mortgage loans, car loans, and secured credit cards. We give a quick rundown of each below:
Secured personal loans
Secured personal loans require the applicant to offer an asset that they own as collateral on the loan. This could be in the form of a car, motorbike, caravan, or anything else deemed sufficient by the lender. Typically, personal loans for larger amounts are secured and come with lower interest rates. On the other hand, unsecured personal loans for high amounts generally come with higher interest rates.
Mortgages are usually secured loans with the house being purchased serving as the collateral. If the borrower doesn’t pay off the loan, the house can go into foreclosure and the borrower loses their home.
Car loans, along with loans for other vehicles like motorbikes, boats, or even private planes, are also considered secured. Again, the vehicle is the collateral on this type of loan and failure to make repayments can result in a repossession by the lender.
Secured credit cards
Unlike these other types of secured loans, secured credit cards typically require a cash deposit as collateral. If the card holder doesn’t make their monthly repayments, the bank or lender can withdraw from this deposit and apply the funds towards paying the bill.
What is bad credit?
Having bad credit means that you have a negative history of repaying credit. Your credit score is calculated based on your credit report, which details your history of accessing and using credit products. This could include loans, credit cards, lines of credit, or any other type of finance. It also features your personal details, along with information about any applications for finance and payment of utility bills.
Your credit score will range from zero (or sometimes below zero) to 1,000 or 1,200 depending on the credit reporting bureau. While it varies between agencies, in general, usually a score below 500 can be considered ‘below average’.
How does having bad credit affect your ability to get a loan?
If you have bad credit, it can be more difficult to find a suitable loan. This is because your credit score is used by lenders to determine how risky you are as a borrower. It also helps to determine the interest rate that they will offer you on the loan. Generally, traditional lenders have strict credit requirements, whereas online lenders tend to be more lenient. In this way, having bad credit limits your lender options, as an online lender may be the only avenue for finance suitable for you.
If you do find a loan with bad credit, it will typically be for a smaller amount and come with a higher interest rate. If you opt for an unsecured personal loan, you are perceived as a risky borrower. This is because there is no assurance for the lender that you will repay your loan. However, with an asset as security, this provides a safety net for the lender, and may increase your chances of loan approval.
Secured personal loans vs. unsecured personal loans
In order to understand how a secured loan may benefit you if you have bad credit, let’s make a broad comparison between secured loans and unsecured loans:
|Unsecured Personal Loan
||Secured Personal Loan
|Doesn’t require an asset.
||Requires an asset.
|Usually for smaller amounts (up to $2,000).
||Allows you to borrow higher amounts.
|Quicker approval due to less information required on application.
||May have slower approval due to more information to process and verify.
|Higher risk for lenders.
||Lower risk to lenders due to security.
|Higher interest rate than secured loans due to high risk.
||Typically comes with a lower interest rate.
|Smaller loan terms: larger repayments over a shorter period.
||Longer loan terms: typically smaller instalments over a longer period of time.
How can a secured loan help me if I have bad credit?
A secured loan can help you find a suitable loan with bad credit as it provides an added layer of protection for the lender. At the end of the day, banks and lenders want your business. Secured loans allow them to provide credit products to customers with mitigated risk.
Having bad credit is not the only factor lenders consider when processing your application. Online lenders, like Jacaranda Finance, take an inclusive approach to lending for those considered ‘unbankable’ by traditional institutions. We utilise AI and machine learning to have an inclusive application process, with your bank statements considered as well as credit history.
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Written by Rachel Horan
Rachel Horan is a Content Writer for Jacaranda Finance. Rachel has previously produced content for Brisbane City Council, Black & White Cabs, and Clubs Queensland. She has a Bachelor of Mass Communication with Distinction from the Queensland University of Technology.