The thing about having bad credit isn’t that they cause problems with future loans, but that they appear to be more problematic than they actually are to most people who experience them. But the truth is, it’s pretty natural for someone to get into bad credit and equally natural to eventually get out of it. Of course, some people will be at a worse position than others, but generally there are many ways to deal with bad credit.
Perhaps one of the most practical ways of dealing with bad credit is getting secured bad credit loans. This is a type of loan that’s granted to people with bad credit and otherwise unable to get loans like other people. It’s considered a secured loan because it would require some form of security to be given to the lender, which is understandable because of the borrower’s current credit rating.
Secured bad credit loans are very helpful in the hands of someone who knows how they work. That’s why it’s important to take time to understand their nature as a secured loan and how they help people get out of a bad credit status.
Is this similar to most bad credit loans?
Insofar as they are a special type of loan granted to people with bad credit ratings, yes. But what sets secured bad credit loans apart from other types has a lot to do with how lenders see borrowers with bad credit ratings, which is summed up in two central ideas:
- They have a record of being unable to pay debts they incurred in the past;
- They need to make a loan
Now, there are as many reasons for a person to get bad credit rating as there are people who get that status. A losing business, medical emergency, unexpected costs, and any situation that would cause financial instability would lead a person to be unable to pay loans. And sometimes these would lead to a cycle of debt which would all be in the borrower’s records. Unfortunately, none of these reasons matter to the lender – the only thing that they care about is that they’re dealing with a person who could possibility be unable to pay the loan they’re applying for.
Thus, people who resort to bad credit loans will normally experience higher interest rates, heavier documentation requirements, and other kinds of additional security for the loan. This is to show to the lender that the borrower still has the means to be able to pay back the loan they’re applying for.
But secured bad credit loans are different in a sense that they don’t usually involve these other requirements. When you attach a security to your loan, that is usually more than enough to ensure the lender that they have something to go after in case you can’t pay, defeating the need for higher interest rates, added fees, and other things that come with unsecured bad credit loans. In a sense, secured bad credit loans don’t factor your credit ratings much in the transaction anymore because you’ve added a security to the loan.
How are they different from other bad credit loans?
This is how secured bad credit loans differ from its unsecured counterparts:
- Unlike payday loans which require you to pay on your next pay date, there’s a more flexibility as to the deadline of the secured loan. Also, payday loans tend to have ridiculously higher rates.
- Compared to a line of credit where you can withdraw cash up to a certain amount, the limit to the amount of cash you can borrow depends on the security.
- Secured bad credit loans usually just involve a single loan transaction, while debt consolidation loans involve multiple debts, which can be complicated.
What other things make these secured bad credit loans so better?
We already pointed out that bad credit loans with security usually have lower rates and fewer fees than unsecured loans. While this doesn’t mean there won’t be higher interest rates than good credit loans, the added rates won’t go as high.
But you actually get a lot more for putting up a security against a bad credit loan. For one thing, you get longer loan terms. The lenders won’t be worried too much about you not having to pay sooner because of the security.
You also get a more flexible loan amount. Some lenders might impose a cap on the total amount you can borrow, but it will never be as limited as the unsecured bad credit loans. Most of the time, however, the amount you can borrow will depend on the value of the security, which is pretty much the same as the regular loans.
Just like regular loans, you’ll have more freedom in deciding your payment terms. Deadlines won’t be a strict, and you can choose between paying weekly, fortnightly, or monthly. This flexibility is particularly important because you need to make sure you’ll be able to pay by then – a luxury you won’t have when you’re in a financial bind.
And since these loans are usually made on emergencies, it’s nice to know that bad credit loans get processed as fast as regular loans whenever they have security. Most lenders will contact you immediately after they’ve received your application so they can work on your loan as soon as possible.
Finally, you can use the money you borrowed for almost any purpose you need it for. And because financial problems that cause bad credit ratings can come in different forms for different people, it’s helpful that you can use the money that you think best addresses your financial concerns.
So is the secured bad credit loan always the way to go?
Not exactly. Admittedly, having a security against bad credit loans offer more flexible payment schemes, higher loan amounts, and less strict eligibility requirements. But remember that this is all at the guarantee of the security you’re giving, such as your home or car. The security only helps you get over the hurdle of your application being rejected because you have bad credit ratings. But the security is a risk in itself.
You need to assess whether you really need to put up a security for that loan. There are still some unsecured bad credit loans that, depending on your circumstances, will be less burdensome. While you don’t plan on having your car or house repossessed because you failed to pay the loan, you need to take that risk into consideration.
When is it a good time to get security on a bad credit loan? When is it not?
Assessing whether a bad credit loan is worth attaching a security with should always be taken on a case to case basis. There are so many factors to consider that it’s just not possible to a have a perfect checklist that will tell you if a secured bad credit loan is good to go. But there are certain things you can ask yourself before you take a security against a loan you badly need despite your bad credit ratings:
- Do I need more than the usual personal loan amounts? If you just need a small amount to get by until your next paycheck or to be able to pay off bills that are due, you might not need to stake your house on that and just go for the higher interest rates. Besides, if you pay the loan on time (which you definitely should, given that you already have bad credit), the interest rates won’t mean so much.
On the other hand, larger expenses that need to be dealt with might not be covered by personal loans. The security will allow you to get a higher amount depending on the value of that security. Some examples of these expenses are major car repairs, capitalizing a business, emergency medical expenses, and maybe even some education costs.
Note: To be able to properly weigh between the two, try to see what the available rates are if you opted for a personal, unsecure loan. This will require you to browse through available non-secure lenders, which you’re going to do anyway as per the next tip.
- Have I tried other methods of getting a less onerous loan? A lot of people think that having bad credit means you’ll never be granted loans by your usual lender. As mentioned before, bad credit is not always as bad as it looks. Lenders will tend to look at your credit history anyway and try to assess whether the bad credit rating really does mean that you’re incapable of paying, or that there were more acceptable reasons why you ended up in that financial state.
So it wouldn’t hurt to ask some lenders if they’re still willing to loan you some money as usual. But in the event that they do turn you down or when the interest rates, fees, and other costs are way too high for you, then going for a secured bad credit loan might just be the better option. Note: good effort in comparing would normally involve a comparison between three to four local lenders.
Tip: If you need cash, you might want to try borrowing money from your family or friends first. It’s not always a pleasant or comfortable thing to do, but borrowing money from a trusted loved one at a time of need might spare you the complications of putting up residential and commercial property for a loan.
- How soon do I need the cash? Bad credit loans are much easier to process and approve when they are covered by security. If you need quick cash for something that absolutely needs to be dealt with, then a secured loan would definitely be better. Otherwise, you’re better off just waiting a few more days for that personal loan rather than putting up a car or house as a security.
But there are also definite no-no’s when it comes to taking up bad credit loans with security. If you see any of these, then you’re going to want to look for another lender to transact with:
- Incredibly high rates. Sure, having bad credit might mean you’ll have to pay more on interest and fees, but there’s such a thing as too high. It’s not just about whether you think you can pay up the interest or not it’s about them being plainly exorbitant. There are so many ways to determine whether the rates you’re getting are beyond the usual – even for bad credit loans, and with security at that! Even with bad credit, some rates are just too high, especially when you’re putting up some of your property as security.
- Aggressive Lenders. Not all lenders take advantage of their clients, but there are those that do. Once they find out you’re in need of a loan, they’ll try to convince you to take up a loan with them like they’re the only option you have. If, by any means, you feel like you’re being pressured or have any doubts about taking up a loan, then walk away. You shouldn’t be putting your car or house at risk with them if they were the last lenders in your city.
Some Tips when in Need of Secured Bad Credit Loans
Keep track of your credit status. Make sure you know what the accredited credit rating agencies are within your locality or your area of business. If you’re looking to take up a secured loan despite your bad credit rating, then you’ll want to be ready to acquire much needed documents that prove your credit standing. The Securities and Exchange Commission is usually the regulating body for these credit rating agencies, so you can find means to contact them through the SEC.
Note: Don’t ever try to soften your credit standing to a lender by giving incomplete documents. If they find out you didn’t show them your actual history, you’re going to look much worse than you already think you do. These agencies are well aware that people get into bad credit standings – it’s better to let them completely understand your history so they can help you out.
Also, it won’t hurt to be a bit more familiar with the credit rating system. This will not only help you better understand your standing, but it will help you figure out how to improve it in the future. So take some time to brush up on the topic.
Have a reliable accounting of your assets. The value of your property that you’re putting up as security will most likely affect how much you can borrow at the time. It’s not just about maximizing to value you can borrow. It’s also about making sure you only use assets that are enough for the amount you need to loan. Putting up a security with a value that’s much higher than the amount you need is just putting an unnecessary risk over that asset.
Identify what counts as security. Of course, this will mainly depend on the lender. Some lenders specialize in taking certain kinds of assets while others will take loan applications on a case to case basis. Other than that, the usual practice is that residential and commercial assets can be used to secure bad credit loans.
Real Property. Homes and lands are usually the most common collateral for any kind of loan, including those that accommodate bad credit ratings. Most lenders wouldn’t have been so keen on housing as collateral way back when the housing financial crisis was a concern, but not so much today.
The most common example of this are your vehicles. For those who are already cutting costs due to financial problems and won’t be spending on gas money much, your car might be a practical choice for a collateral. But lenders will be wary of taking this because vehicles depreciate in value. Should you plan on putting using this kind of security, be careful to make an allowance for depreciation so as to avoid complications in case of a default.
In some cases you can use this type of loan when you badly need to purchase a new car but don’t have the means. In this case, the car itself will be the collateral.
Business assets. Because individuals are usually separate from their businesses (or at least it’s wise for them to separate their personal finances), those who want to make a loan for business purposes can opt to secure their loans with their assets. These will usually come in the form of either real or personal property that’s used primarily for the business, such as the establishment or some large equipment that’s of high value.
Deposits and Receivables. Applicable to both personal and business loans, receivables refer to amounts that you’re still going to receive. It might sound weird to be making loans when you’re getting or have money anyway, but sometimes the cash we have aren’t something we can spend at the moment. So you secure your bad credit loan with money or deposits that you can only access in the future.
Try to negotiate with the lenders. Always take this opportunity so you can convince the lenders to lower your interest rates or grant you a bigger loan. This doesn’t always work, but when given the chance to explain your situation, lenders will sometimes make special considerations even for people with low credit standings.
Can secured bad credit loans help fix my credit rating?
Absolutely! Improving your current credit rating is all about making sure you don’t fail to pay anymore debts. To do this you need to make good all your present debts. This includes paying bills of all kinds and paying up any loan interests and fees. But the problem is most people with bad credit standing aren’t usually given the chance to have loans to pay back in the first place. But because lenders to secured bad credit loans are not so hesitant, borrowers will get a chance to successfully pay back a loan.
Some final tips when getting a secured bad credit loan
- Work within your budget. Because of what’s at stake (i.e. the security you’re putting up, your credit ratings), make sure to enter a secured bad credit loan only when you know that you have the means of paying for it. Otherwise, you’re only going to make things worse.
- Only make loans for essentials. Again, make it a point to assess whether the need for the money will outweigh the security that you’re placing against the loan. If the expense is something that you can put off until you’ve got more money in your pocket, then it’s better to wait. It’s already tough getting a loan with a bad credit – you need to save those opportunities when you’re in dire need of money.
- Make sure all fees, etc. are accounted for. When working within your budget, you need to make a margin for these added costs. Conversely, you also have to make sure that you cross out any add-ons that come with the loan. While these are helpful add-ons in one way or another, they’re not practical when you’re trying to cut costs on a bad credit loan. Make sure to keep track of everything.
Tip: it also pays to be fully aware of all the penalties and interest that you might have to pay for in case of default. Thus, reading the loan contract’s terms and conditions can take you a long way.
What if I’m not exactly sure what to do?
A personal financial crisis can be confusing, and there’s a big chance you might not know what the best solution is for your problem. When this happens, it doesn’t hurt to ask the help of a secured loan expert to analyze your current situation.
In the end, secured bad credit loans don’t have to be complicated. It’s all a matter of knowing what to do in order to secure money you badly need and have an opportunity to fix your bad credit rating.