Simple Guide to Secured Loans for People with Bad Credit

Michelle Tuvey Michelle Tuvey | Loan Underwriter

Bad credit can make it very difficult to obtain certain forms of financing, such as car loans and credit cards, but it will usually not prevent a consumer from getting a secured home loan. By definition, a secured loan reduces the lender's risk by giving them a piece of tangible property they can hold as security for the debt. This makes them more willing to lend to those with bad credit.

If you are in need of financing for debt consolidation, home renovation, or any other purpose, a secured loan is one of your best options. It can provide the funding you need while also helping you repair bad credit along the way. Here is an easy guide to secured loans to get you started:

How Secured Loans Work

A secured loan taken against your property uses the equity in your home as security. If you have £50,000 in equity for example, that is the maximum you will be able to borrow against your home. You can use that money for any number of purposes. If you have bad credit, you will probably pay a slightly higher interest rate and a few additional fees and charges. However, you should still be able to get a loan against your equity.

The Risks

Both parties in a secured loan are taking some measure of risk. The lender is risking the possibility that you might not make good on your payments, you are risking your home. In the event of default, the lender can repossess and sell your home to recover the debt.

This might be a risk worth taking if you have bad credit. Assuming an analysis of your budget shows you can make your monthly payments, you could use a secured loan to consolidate your debt and repair your credit history. You will have nothing to worry about as long as you make your payments on time.

Other Things You Need to Know

Obtaining a secured loan with the best rates and terms requires you to compare multiple lenders. Here are some important things you need to know prior to beginning the comparison process:

  • Interest Rates ?? Loans may be advertised at either the annual percentage rate (APR) or the representative APR. These are not the same thing. The APR is the amount of interest paid annually on the outstanding balance. Representative APR is a combination of that interest and all of the charges and fees associated with borrowing.
  • LTV Ratio ?? In most cases, you will not be able to borrow the full amount of your equity. You will only be able to borrow a portion of it, expressed as the loan-to-value (LTV) ratio. An 80% LTV means you will be able to borrow only 80% of your equity.
  • Loan Terms ?? The loan term is the amount of time you have to repay your loan. A longer term means lower monthly payments but more interest paid over the life of the loan. A shorter term means higher monthly payments and less interest paid.

Be diligent to compare secured loans side-by-side. Also understand that there is no way to know exactly what kind of deal you are going to get until you apply. The information you have gathered during the comparison process is just a guide based on reasonable estimates.

Bad credit should not be a severe hindrance to getting a secured loan taken against your home. In fact, you can begin repairing your credit by using a secured loan to consolidate high interest debt. Consider it if bad credit is a problem for you.

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