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Secured loans for bad credit: A guide to your options

Learn how to obtain secured loans with bad credit. Explore your options, understand the requirements, and find strategies to improve your chances of approval.

Siarra Ortiz
June 14, 2024
Updated:

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Finding a loan when you have bad credit can be challenging—especially when most options have higher interest rates and less than favorable terms. 

However, if you're grappling with poor credit, a secured loan can be a real game-changer. By using collateral to back the loan, lenders are more willing to take the risk—helping you secure the funding you need, with better terms. 

This guide will explore various types of secured loans for bad credit individuals, how they work,  requirements, and important considerations.

Secured loans: An overview

Secured loans require borrowers to offer collateral to offset the risk of default. If the borrower defaults on the loan, lenders have the right to seize the asset and recoup their losses. 

Since secured loans can be easier to qualify for and deliver better terms, they make sense if you're confident in your ability to repay the debt. 

Secured loans make sense for:

  • Bad credit borrowers who don't meet the requirements of unsecured loans.
  • Homeowners with significant equity in their property looking to finance a major purchase or expense.
  • Small business owners and self-employed individuals who lack traditional or fluctuating income.
  • Entrepreneurs needing capital to start or expand their business.
  • Borrowers who may qualify for an unsecured personal loan but want a better rate or longer repayment period.

Secured loans for bad credit borrowers

Secured personal loans

Secured loans require you to pledge an asset, like a savings account, as collateral for the loan. Your collateral reduces the risk for the lender, allowing them to look past a poor credit history. It also means that secured loans often come with lower interest rates and more favorable terms than unsecured loans. You'll be on the hook for monthly payments over a 1 to 5-year repayment term.

Secured personal loans are offered through banks, credit unions, and online lenders. However, they are less commonly available than unsecured ones, so you'll have to shop around. 

Reputable lenders include Navy Federal Credit Union, KeyBank, and Upgrade

  • Loan amount: Up to $50,000
  • Requirements: Collater, credit score ranges from lender to lender, proof of sufficient income to repay the loan
  • Cost: Origination fees; Interest rates vary

CD loans

A certificate of deposit (CD) loan, or CD-secured loan, allows you to borrow money from your certificate of deposit penalty-free. The bank will place a hold on the CD account equal to the loan amount, giving you the credit in cash. You then repay the loan plus interest through fixed monthly payments. Repayment terms can range anywhere from 6 months to 5 years. The main benefits of CD loans are the low interest rates and the fact that CDs continue earning interest throughout the loan term.

In general, banks and credit unions offer certificates of deposit loans.

  • Loan amount: Typically up to 100% of your CD's value
  • Requirements: A CD account, sufficient funds, and good standing with the bank
  • Cost: 2% to 3%

Cash advance loans

Cash advance loans are a type of short-term financing secured by your future income. They operate similarly to payday loans but are safer and more affordable.

There are numerous online cash app platforms to leverage, and funding is pretty straightforward. You'll submit a loan application online and provide any necessary documents through the platform. Once approved, funding is typically same-day or the next business day. You'll be required to link your bank account so the platform can automatically repay the loan with your next paycheck.

Reputable cash advance apps include Dave, MoneyLion, Payactiv, and Varo. However, it’s always best to compare lenders to find the best rates and terms. 

  • Loan amount: $500 to $1,000
  • Requirements: Pay stubs or proof of regular income, a checking account, and authorization of automatic bank withdrawal
  • Cost: Many platforms have a 5% transaction fee; some require a subscription fee to use the platform

Home equity loans

If you own a home and have sufficient equity, tapping into your home’s wealth is one of the best ways to access a large amount of cash with favorable terms. One way to do so is with a home equity loan. 

A home equity loan provides a single lump sum payout in exchange for monthly payments over a 5 to 30-year term. These loans come with a fixed interest rate, creating predictable monthly payments. They are typically larger loans, which is great when you have a major expense, like a home improvement project or debt consolidation, to cover.

  • Loan amount: 80% to 85% of your home’s value
  • Requirements: 15%-20% equity, 620 credit score or higher, a debt-to-income ratio of 43% or lower
  • Cost: Closing costs; interest rates range from 8.62% - 9.49% 

Home equity investments

Although not technically a loan, home equity investments (HEIs) are a great source of financing for homeowners who are self-employed or have less-than-ideal credit.

With an HEI, you get cash in exchange for a share of your home's future appreciation. There are no monthly payments to make over the flexible 30-year term. Instead, you repay the investment anytime during the term when you refinance, sell the home, or use another cash reserve.

  • Amount: Up to $500K
  • Requirements: Minimum credit score required is 500, no income requirements, sufficient equity in your home or an investment property
  • Cost: Standard closing costs; buyback cost is dependent on change in appreciation when you exit 

You can prequalify for an HEI without impacting your credit.

 Home equity lines of credit

It can be extremely challenging to qualify for a home equity line of credit (HELOC) with bad credit—but it’s possible. A HELOC works like a credit card and offers a revolving line of credit over a 10-year draw period, during which you'll only be responsible for interest-only payments. Once the 20-year repayment period begins, you'll have monthly payments with a variable interest rate.

Since HELOCs offer flexibility, they're a good way to cover ongoing expenses, like starting a business or tackling various home renovation projects. Gauge your eligibility with this free HELOC qualification calculator

It’s important to note that, like with any equity financing, you risk foreclosure if you default on the loan.

  • Loan amount: 80% to 85% of your home’s value
  • Requirements: 15%-20% equity, 620 minimum, but 680 is preferred, a debt-to-income ratio of 43% or lower
  • Cost: Closing costs; interest rates range from 8.64% - 10.81%

401(k) loans

A 401(k) loan lets you tap into your retirement savings penalty-free. You'll have five years to repay the loan plus interest back to the account. Repayment generally occurs through automatic paycheck deductions, which helps streamline the payoff process.

There are pros and cons to 401(k) loans — but the most serious consideration is the potential to fall short of your retirement savings. For this reason, you may want to consult a financial advisor or revisit your 5-year plan to gauge how a 401(k) loan may impact your situation.

  • Loan amount:  50% of your vested account balance, up to $50,000
  • Requirements: A 401(k) plan that permits loans 
  • Cost: Current rates are 9.5% to 10.50% – paid back to your account

Term loans

If you're interested in financing for business-related expenses, you may wish to consider a term loan. Term loans work similarly to personal loans; you receive a lump sum of money upfront and repay it over a set period with monthly payments. However, they offer higher loan amounts and can be easier to qualify for since the loan is secured by an asset such as real estate or a down payment.

Medium-term loans have a payment term of 3 to 5 years, while long-term loans can extend up to 10 years or more.

  • Loan amount: $500,000 for medium or intermediate-term loans; millions of dollars for long-term loans
  • Requirements: Sufficient collateral, good credit (varies by lender), a strong business plan
  • Cost: Origination fees; interest rates vary from lender to lender 

Title loans

Title loans allow you to leverage your vehicle as collateral for cash. You can borrow a percentage of your car’s value, and the lender holds the title until the loan is repaid. Repayment terms vary but are usually short, ranging from 15 to 30 days. If you fail to repay the loan, the lender can repossess the vehicle.

These types of loans have exceptionally high interest rates, which can lead to a vicious debt cycle. Title loans should be considered a last resort.

  • Loan amount: Up to 50% of your vehicle’s value
  • Requirements: Clear title to your vehicle, proof of income, and identification
  • Cost: 25% monthly 

Payday loans

When looking for low-credit lenders, payday loans often come up. These are short-term, high-interest loans that come due on your next payday. While they offer quick funding, exorbitant interest rates lead many into a vicious debt cycle.

Payday loans are illegal in various states and should be avoided. If you feel you have no other options, consider a payday alternative loan. These loans are offered through federal credit unions and are a safer option. Payday alternative loans have a max APR of 28%.

  • Loan amount: $50 to $1,000; Up to $2,000 for payday alternative loans
  • Requirements: Proof of income, a checking account, and identification
  • Cost: 300% APR for payday loans; max 28% APR for payday alternative loans

The pros and cons of secured loans with bad credit

When determining if a secured loan is right for you, it’s important to evaluate the benefits and risks. 

Pros

  • Improved approval chances: You can qualify with bad credit or limited credit history.
  • Lower interest rates: Your borrowing cost will be less.
  • Higher loan amounts: Because the loan is backed by collateral, lenders are often willing to lend larger sums of money.
  • Credit building opportunity: Repaying a secured loan can help improve your credit score.
  • Flexible use: You can use your funds for anything, helping you to accomplish your goals. 

Cons

  • Risk of losing collateral: The most serious downside is losing the collateral should you default. In most cases, a lender will want to work with you and try to resolve the issue rather than seizing your valuables. Still, it's a tricky situation to be in.
  • Longer approval process: Since lenders need to appraise and verify the value of the collateral, the process can take longer than obtaining a standard personal loan.
  • Potential fees: Secured loans may have additional fees, such as appraisal fees, origination fees, and closing costs, which can increase the overall cost of the loan. 

Before applying for a loan

  • Check your credit report: Take advantage of your free credit report. Check for errors and dispute any inaccuracies to improve your credit score.
  • Protect your credit—build it if you can: Avoid hard pulls on your report, and continue to make timely payments to prevent a dip in your score. If you can, report your utility payments and make extra payments on any debts to increase your score. 
  • Evaluate your income: Proving a stable and sufficient income is critical if you’re hoping to secure a loan backed by income or equity financing. Be sure to have organized documents, especially if you're self-employed. If your income is prone to fluctuation or insufficient, consider increasing your cash flow for a short time. 
  • Consider a co-signer: Having a co-signer with good credit can improve your chances of approval, so it’s worth asking a trusted family member. However, it's important to remember they're liable if you default on the loan. 

Final thoughts

Secured loans can be a lifeline when your creditworthiness is shaky. Each type has its own requirements, benefits, and risks to weigh. Ultimately, what's best for your situation comes down to your unique needs. Important questions to ask yourself are,

  • What are you willing to give as collateral?
  • What can you afford?
  • What will help you most in the short and long term?

Once you understand your situation, you can compare products, loan terms, and rates to find the best solution. 

If you own a home or investment property with sufficient equity, leverage a Home Equity Investment to accomplish your goals. Point’s HEI offers no monthly payments over a 30-year term, giving you much-deserved financial stability—and relief. Visit point.com/hei to learn more. 

No income? No problem. Get a home equity solution that works for more people.

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