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Navigating secured loans for bad credit: a comprehensive guide

If you have a bad credit history, most lenders will consider you a risky prospect. They’re very likely to ask for some form of collateral before offering you a loan. Here’s what you need to know about secured loans for bad credit.

If you have a bad credit history, most lenders will consider you a risky prospect. They’re very likely to ask for some form of collateral before offering you a loan. Here’s what you need to know about secured loans for bad credit.

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
4 APRIL 2024
5 min read
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What are secured loans?

Secured loans are those where you offer up some form of collateral in case you fall behind on your repayments. If a lender considers you a high risk or you want to borrow a particularly large sum of money, you’re more likely to be offered a secured loan.

Secured loans work in the same way as personal loans, except you risk losing the asset you put up as collateral – typically your home – if you don’t make your repayments.

Paperwork can be complicated and if you’re securing a loan against your home, you should get legal advice to check the agreement and to make sure you fully understand what you’re committing to. You’ll need to pay a fee for this, which will add to the cost of the loan.

If you have a bad credit history and don’t qualify for an unsecured loan, you may find it easier to get one that’s secured. But think carefully before taking on a secured loan as you could lose your home or other asset that you’ve used as collateral.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

Loans and bad credit

Whether you’re accepted for a loan and the interest rate you’re offered will depend on your credit history, including your credit score – an independent assessment of how likely you are to repay money.

If you have ever paid bills late or got into large amounts of debt, you’re likely to have a lower credit score than someone who has made all their repayments on time. And this will limit your choice when it comes to loans.

Having a good credit score makes it easier to borrow money at lower interest rates than if you have a poor credit score.

If your credit score isn’t what it should be, a bad credit secured loan could be an option for you. Alternatively, you could work on improving your credit rating.

Secured loans and bad credit: what you need to know

You may be able to get a secured loan if you have bad credit, although you might find your options are limited. As you’ll be offering up something valuable as collateral, your home for example, lenders are likely to be more willing to lend to you.

But be aware that if you do use your home as collateral for a secured loan and you miss repayments, a lender may take action to repossess it and sell it to get their money back.

If you jointly own a home, you’ll need to apply for a secured loan in joint names and you’ll both be responsible for making the repayments.

Instant decision loans

You may see ‘secured loans for bad credit instant decision’ advertised online. With this type of loan, a lender will let you know immediately whether you qualify.

An instant decision loan could be useful if you need to borrow money quickly, as you’ll have access to cash sooner than you might with an unsecured loan.

However, these loans can come with very high interest rates. As with any type of loan, make sure you read the small print carefully. And always make sure you can afford to make the repayments regularly and on time, otherwise you could lose your home or other asset.

What are the pros and cons of a secured loan with poor credit?

Looking for a secured loan with bad credit? Consider these advantages and disadvantages:

Pros:

  • It’s potentially easier to qualify for a secured loan than for an unsecured loan.
  • Interest rates may be lower than on unsecured loans.
  • You can usually borrow more and for longer than with an unsecured loan.
  • If you make your secured loan repayments regularly and on time, it could improve your credit score.

Cons:

  • You risk losing your asset if you don’t make repayments on time.
  • It can take two to six weeks to get a secured loan due to the paperwork involved.
  • The loan may come with high fees.
  • Secured loans sometimes have variable rates. If interest rates go up, your payments could too. Make sure you know if your rate is fixed or variable.
  • You may have to pay an early repayment charge if you pay off your loan early.
  • The repayment term may be longer than for a standard loan, meaning you’ll pay more in interest overall.

If you want to borrow a smaller amount, you may not be able to easily find a secured loan so your choice might be limited. Don’t be tempted into getting a larger loan if you don’t need it as this could make your money problems worse.

Secured loans in the UK market

There are lots of smaller providers in the UK that specialise in secured loans. Many of these are aimed at people with bad credit who wouldn’t otherwise qualify for a loan.

Before taking out a loan, always check that the lender is approved by the Financial Conduct Authority (FCA). That way, you can see that it’s a legitimate, authorised business. Check the FCA register.

Do I really need a secured loan?

As secured loans come with risks, it’s worth considering whether you really need one  and if there are possible alternatives.

  • Debt advice – if you’re struggling with debt, consider getting some free, non-judgmental debt advice to see if you can solve the problem another way. Get in touch with Citizens Advice, StepChange or National Debtline, or use the Moneyhelper tool to find debt advice.
  • Personal loan – this type of loan is less risky and may be cheaper if you can pay it back over a shorter period.
  • Remortgaging – if you’re considering a secured loan for home improvements, you may be better off remortgaging to free up money. Get advice from a mortgage broker to discuss your options. And don’t forget to take fees into account.
  • Credit card – you may be able to get a 0% balance transfer card, a 0% money transfer card or a 0% purchase card. These may come with fees and are less likely to be available to people with bad credit. Use our credit card eligibility checker to see what cards you’re likely to be accepted for without impacting your credit score.

Legal considerations

Secured loans give lenders the legal right to repossess your property (or another asset) if you don’t keep up your repayments.

Frequently asked questions

How to get a secured personal loan with bad credit

To find out what secured loans you’re likely to be accepted for before you apply, use our loan eligibility checker. It uses a soft credit search so won’t impact your credit score.

Then compare interest rates and terms on those loans you’re likely to be eligible for, make your decision and apply for the loan of your choice.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

What can be used as collateral for a secured loan for bad credit?

The most commonly used collateral for a secured loan is property. But you may find lenders who will accept other assets, such as cars, art or jewellery.

Can I be rejected for a secured loan because my credit score is too low?

It’s possible that a lender might not accept your loan application if your credit rating is too low. But lenders have different eligibility criteria, so just because you’re rejected by one lender doesn’t mean you won’t be accepted by another. It’s a good idea to see which loans you’re likely to be eligible for before applying. Too many loan applications in a short period could further damage your credit score.

You may also want to consider whether taking on a loan is the best option for you. It could be a good idea to talk to a debt charity to help you resolve issues around your finances. If you take on a loan and can’t keep up the repayments, it could make your problems worse.

Can a secured loan help me improve my credit score?

A secured loan could help you improve your credit score. If you show you’re a responsible borrower, by making all your payments on time, for example, it could boost your credit rating.

Can I pay off a secured loan early?

You can usually pay off a secured loan early, but you may be charged an early repayment charge.

You’ll need to weigh up the cost of the early repayment charge (ERC) against the amount you’ll save in interest to see if paying off your loan early is the right option for you.

Can I get a secured car loan?

Secured car loans shouldn’t be confused with what are known as logbook loans.

With a logbook loan, you secure your loan against a vehicle. It allows you to get a secured loan without risking repossession of your home, but you’ll need to own the car first.

Typically, with a logbook loan, you sign a personal loan agreement and a bill of sale agreement where you transfer the ownership of your car to the lender until you’ve paid off the loan in full. Logbook loans are viewed as a risky and expensive way of borrowing money.

Logbook loan complaints to the Financial Ombudsman are common. Make sure you fully understand how the loan works and the small print if you opt for one.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

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Alex Hasty - Insurance comparison and finance expert

At Compare the Market, Alex has had roles as Commercial Associate Director, Director of Trading and Director of Growth. He’s currently responsible for the development and execution of Comparethemarket’s longer-term strategic options, ensuring the right breadth of products and services that meet customer needs.

Learn more about Alex

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