If you need to take out a personal loan but don’t have perfect credit, you might think you’re out of luck. This isn’t necessarily the case. While most personal loans are unsecured, secured personal loans can be a great option for borrowers with poor credit.
What is a secured personal loan?
When you apply for an unsecured personal loan, the lender will look at things like your credit score, debt levels, and income. If your credit score doesn’t meet their criteria, they probably won’t offer you a loan with favorable terms.
Some lenders, however, offer secured personal loans. These loans require that you pledge collateral equal to the loan amount so that the lender doesn’t face as much risk with the transaction.
The advantage of a secured personal loan is that you can still borrow money to meet a financial need. Also, paying off a secured personal loan can help boost your credit score.
The disadvantage of these loans is that you risk losing an asset if you don’t make your loan payments. You can also further damage your credit with a default. Finally, some unsecured personal loans have higher interest rates and additional fees.
What you can use to secure a personal loan
When you take out a secured personal loan, you must have something to put up as collateral. Most people use such things as cars, household goods, and savings to secure a personal loan.
Secured Auto Loans
Before you look for a personal loan using your car as collateral, examine your current budget and auto loan terms. If you have an auto loan at a high interest rate, your best bet might be to refinance your auto loan with more favorable terms.
Refinancing your car loan can get you a lower monthly car payment, which will free up money in your monthly budget. This is a good choice if interest rates have dropped since you purchased your car and your credit has improved.
If you have some equity in your car, you might be able to get cash-out refinancing. This means that you take out a new loan, which replaces your old auto loan, and receive some cash back based on your the value of your vehicle.
It’s important to understand the difference between securing a personal loan with a car and taking out an auto title loan. A secured personal loan will have reasonable interest rates, while a car title loan will charge you annual percentage rates (APRs) of 300% or more.
If you use a vehicle to secure a personal loan, read the fine print. Some lenders will require you to purchase additional insurance and designate them as a named insured on your policy. Include these additional requirements when calculating the actual cost of your loan.
Other lenders might allow you to use household goods to secure a personal loan. This could include expensive furniture, electronics, and recreation equipment. If you own a boat or an RV, either of these might be assets that could secure a personal loan. Just remember the extra caution on insurance.
Secured CD Loans
Many lenders will also grant personal loans to borrowers that have either a savings account or a certificate of deposit (CD) with their institution. If you choose this option, you won’t have access to that money while your loan is outstanding.
Using savings to secure a loan might not make sense since you’re paying interest to borrow additional cash. On the other hand, paying back your secured loan can help you rebuild your credit.
Using a CD as collateral for a personal loan can be a smart choice, as you’d have to pay a penalty to access those funds. If you’re considering using CD funds for collateral, compare the cost of the personal loan with the potential penalties for early withdrawal before you make your decision.
Pawn shops loans are another type of secured loan worth considering if you need cash fast. They accept valuable items, such as electronics, jewelry, gold, and musical instruments, and provide a short-term loan based on their value. High-end online pawn shops, such as Borro, allow you to pawn your valuable for cash without ever entering a pawn shop.
If you pay the fee in time, you can recover your item. Fail to do so, and the pawn shop will sell it to cover the cost of your loan. Although pawn shop loans are not cheap and should only be considered in an emergency, they do provide significant benefits over other high-risk loans, such as payday loans and title loans. Learn more about pawn shops in the article: Are Pawn Shop Loans Ever a Good Idea?
What is considered bad credit?
Your financing choices depend on both your credit score and your access to assets to put up as loan collateral. If you’re not sure about your credit, you can get your free credit score report here.
“Poor Credit” is generally considered to be a score from the low 600’s and below. If you fall into this category, you’re in a similar position to as many as 30% of Americans. Fortunately, there are still ways that you can get financing if you need some cash.
Sources of secured personal loans
The three main sources of a secured personal loan are banks, credit unions, and online lenders.
Of the major U.S. banks, only a few offer secured personal loan options. With some, the catch is that you must have either a savings or CD account with the bank to receive one of these loans.
For example, USAA might offer you a secured personal loan if you pledge the equal value of your CD account as collateral.
Discover Bank also has some secured personal loans, and the terms will depend on your credit score.
Another source of personal loans is your local credit union. If you have an account with a credit union, ask them about secured loans.
Credit unions often work with their members, even those with bad credit, for affordable financing. If you have a CD account or a savings account, you’ll have the best chance of approval.
Lenders Accepting Bad Credit
|Lender||Min. FICO||APR Range|
|No Min||35% – 155%||Apply|
|580||9.95% – 36%||Apply|
|600||15.49% – 34.99%||Apply|
|600||5.99% – 35.89%||Apply|
|640||36% – 199%||Apply|
Some online lenders also make secured personal loans to borrowers with poor credit. These lenders will expect some sort of collateral for the loan, such as a car or another asset.
While LightStream makes unsecured personal loans to borrowers with a minimum credit score of 680, they also might offer you a secured loan if you don’t qualify for their unsecured products.
Your credit score should still be in the mid-600’s to apply at LightStream, but their secured loans have several benefits. The APRs on their secured loans are comparable to their unsecured loans. Also, LightStream won’t require that you add them as a named insured on your auto insurance policy.
Many auto title loan companies will charge APRs of 300% or more, which is why you should be cautious with these loans. There are a few lenders, however, that are more reasonable.
TFC Title Loans operates only in the states of California, Arizona, New Mexico, and Missouri. You can take out a personal loan with this company, using your vehicle as collateral. APRs range from 35.99% to 160% with repayment terms up to 44 months.
Another option that operates in more states is LoanMart. These are also secured loans, using your vehicle’s equity as collateral. Interest rates vary depending on state regulations and your credit but can range from 30% to 180%. Loan applications are online, and you can often receive funds the same day.
If you have a credit score of at least 580 and lack assets to put up as collateral, you should also apply for a personal loan with Avant. These are unsecured personal loans for borrowers with varying credit histories.
Loan amounts range from $1,000 to $35,000, with APRs from 9.95% to 36%. There is also a loan origination fee of 0.95% to 3.75%. If your credit is questionable, expect terms on the higher end of this scale.
Let’s assume you need a $5,000 loan, and the loan origination fee is 3.75%. You finance $4,812.50 over 36 months. At a 36% APR, your monthly payments would be $220.43.
This particular loan, whether secured or not, would be much more affordable than some of the high-interest options that you’re likely to encounter.
Beware of personal loan scams and high-interest loans
When you need access to cash, it can be all too easy to fall victim to personal loan scams or end up paying too much for a loan.
Some red flags to look out for include lenders that don’t check credit at all, have no physical address, or who aren’t registered to do business in your state.
While some lenders that we’ve listed don’t have a minimum credit score requirement, they’ll still look at your credit. Reputable online lenders have physical offices that you can verify. In fact, you can check most companies with your state’s banking regulator.
While payday lenders aren’t all scams, you should avoid them if possible.
These no-credit-check loans come with triple-digit APRs. The same holds true for car title loans. There are often cheaper ways to borrow money, even if you have poor credit.
If you do run across a scam lender, you can report them to the Consumer Financial Protection Bureau.
Comparing personal loan lenders
When you shop for a personal loan and compare lenders, make sure that the option you choose is affordable. If the APR is over 36%, continue looking. You may be able to find a secured personal loan for less than that.
Before you pledge an asset as collateral, be sure that you can repay the loan in full. If you can’t meet the terms of the loan, you are risking the loss of that asset.
Compare such things as the APR listed, loan origination fees, payment terms, and other lender requirements before you make your choice. SuperMoney makes it easy to compare terms, read expert reviews, and check consumer comments for leading online lenders.