Secured loans with bad credit

If you’re looking to borrow money but worried that your credit rating might get in the way, a secured loan could be your best option. Using your house as collateral against the loan makes you more likely to be approved, even if you have bad credit.

If you don’t own a home, you may want to consider a unsecured personal loan with bad credit.

What is a bad credit secured loan?

A secured loan lets you use your home as collateral against the cost of the loan. Also known as a “homeowner loan” or “second charge mortgage”, if you fail to repay your loan, the lender can take ownership of the equity you have in your home.

A secured loan generally offers a more competitive rate than an unsecured loan, as there’s less risk to the lender that it can lose its money.

Much like in the unsecured loans market, a number of lenders have carved out a niche for themselves by focusing on secured loans for people with poor credit.

Are secured loans easier to get?

Putting up security can help borrowers with adverse credit to access a wider selection of loans. As well as making it easier to get approved, applying with the backup of the equity in a home can help applicants to access larger sums and/or lower rates.

Because lenders have the reassurance that they’re less likely to lose their money, your credit rating becomes a less crucial factor in the approval process. What’s still crucial, however, is that you can comfortably afford the monthly repayments.

Will lenders want to check my credit file?

Yes, almost certainly. However, many secured loan companies focus less on your credit score – with some even touting secured loans with “no credit scoring”. In reality, this means that the lender bases its decision (at least in part) on your credit history. For example, when it looks at your history of payments in the last 12 months, if you’ve missed 1 payment, that might be fine. But if you’ve missed 2, you might be declined.

Most lenders can use a “soft search” (a credit check that doesn’t impact your credit score or leave a footprint visible to other lenders) to give you a good idea as to whether it’s worth applying.

As with many other types of loans, secured loan interest rates are more often than not tailored to the individual applicant’s circumstances. In other words, if your credit file has taken a few bumps along the road, you might be offered a slightly higher rate than the lender’s marketed rates. Once again, a soft-search eligibility checker can also give you a clearer idea of the rate you might be offered.

While lenders promote their advertised “representative APRC”, keep in mind that this is the maximum rate that 51% of customers will receive – the other 49% could be given a higher rate. Lenders must tell you your personalised APRC before you sign any agreement with them.

Next steps

Pros and cons of a secured loan for bad credit

Am I eligible for a secured loan?

As with any loan, there are a number of eligibility criteria you need to meet to be considered for a loan. Criteria vary from lender to lender, but as an absolute minimum, you’ll need to be:

• At least 18 years old
• A UK resident
• A homeowner with a mortgage

What are my other options with bad credit?

If you don’t qualify for a secured loan or don’t want to use the equity in your house, you still have a couple of other options:

It may be just as easy and cost-effective to remortgage – this depends on how competitive a mortgage you’re on now vs how competitive a mortgage you could get. For example, if your credit score has deteriorated since you arranged your current mortgage, and you’re on a fantastic low rate, then you may prefer to get a new second-charge mortgage for a smaller amount rather than switching your whole mortgage to a new, less-competitive deal. By contrast, if you’re on your bank’s “standard variable rate”, you might be able to borrow more at the same time as securing a better rate across all your borrowing.

Alternatively, you may be able to get an unsecured loan for bad credit. Without offering the lender security, the maximum amount you can borrow will be much lower – perhaps around £10,000-£15,000, and the interest rate is likely to be higher – perhaps around 15% to 25%

Another option is a guarantor loan. By using a friend or family member (who has good credit) as a guarantor on your loan, you’ll reduce the risk you represent to the lender, which means you’re more likely to be approved for a loan. Guarantor loans typically only go up to £10,000, however, and can come with interest rates over 30% even though you’re giving the lender the reassurance of a guarantor with good credit. It’s also worth noting that guarantor loans are becoming rarer and rarer, meaning there’s less choice and competition.

One way to improve your credit score while borrowing is by using a credit-building credit card. If you can show a credit provider that you can responsibly manage your credit account, you’ll be able to improve your credit and make yourself more likely to be approved for a loan. However, these cards typically come with low initial credit limits – typically below £2,000.

Finally (and perhaps best of all), if you can wait 6 months or more, then it may be worthwhile to focus on improving your credit score first and checking the market again to see if you’re eligible for better deals. Services such as Loqbox offer a free way to boost your credit score while you save.

Can I use another asset as security?

In theory, yes, you may be able to use another form of collateral with certain secured loans. However, many lenders (including those in our panel) only consider customers looking to use the equity in their house as security.

Bottom line

If you have bad credit, you may struggle to get an unsecured loan. A secured loan may be a viable alternative as the assurance of putting up a house as collateral reduces the risk falling on the lender, provided you have a sufficient amount of equity in your property. However, despite a lower risk to the lender, this option provides a higher risk to yourself. Failure to repay the loan could lead to losing the equity you hold in your house or even your home altogether.

Frequently asked questions

• How much can I borrow on a secured loan?

  This depends on factors like your credit history, income vs outgoings and the amount of equity you have in your home. With a low credit score, the maximum you could borrow against your property (across all mortgages) is likely around 80%.

• What rate will I receive?

  The rate you receive also depends on things like your credit history and equity as well as on the terms of your loan. Lenders are required to provide a representative APR on loan products, which is the approximate annual cost of the loan. However, a lender only needs to offer the APR to 51% of customers, meaning the rate you receive may be higher.

• Can I get a secured loan with an IVA or CCJ?

  Yes, you may still get a secured loan if you’re currently under an Individual Voluntary Agreement (IVA) as long as your debtors agree to you taking out another loan.

  If you fail to repay a county court judgement (CCJ), it stays on your credit file for 6 years, during which time lenders may be unlikely to approve you for a loan. However, some lenders may still approve your loan application during this time, provided enough time has passed since you received the CCJ.

• Can I get multiple secured loans?

  Yes, you may get multiple loans as long as you have enough equity to serve as collateral against the cost of the loan. However, lenders may be unwilling to approve your loan if you already have a number of outstanding loans or credit products.

Written by

Tom Stelzer

Writer

Tom Stelzer is a writer for Finder specialising in personal finance, including loans and credit, as well as small business and business loans. He has previously worked as a freelance writer covering entertainment, culture and football for publications like FourFourTwo and Man of Many. He has a Master of Media Arts and Production and Bachelor of Communications in Journalism from the University of Technology Sydney. See full bio