Obtaining secured loans as a bad credit borrower requires debtors to seek out lenders willing to provide financing. While some banks offer bad credit loans, most borrowers need to find alternatives or embark on strategies to improve FICO scores and remove negative accounts reported to credit bureaus.
Secured loans are backed by some type of collateral with the most common being real estate, automobiles and business equipment. Some lenders will grant loan approval based on the type of collateral asset, while others require debtors to obtain a qualified co-signer.
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It is always a good idea for borrowers to obtain a current credit report from each credit reporting bureau before applying for secured loans. These include: Experian, Equifax and Trans Union. Lenders pull credit reports to review borrowers FICO score, previous payment history, number of delinquent or written-off accounts, income to debt ratio, and number of hard inquiries.
Many people do not realize that each time they apply for credit a hard inquiry is reported to credit bureaus. Hard inquiries are not limited to loan activity. Instead, they can include credit checks for employment, home leasing, automobile insurance, or utility companies.
Hard inquiries remain on credit reports for two years. Lenders typically decline loan applications when debtors have more than five hard inquiries. A good rule of thumb is to keep hard credit inquiries to a maximum of three per year.
Debtors can obtain a complimentary copy of credit reports from each of the three credit bureaus on an annual basis from AnnualCreditReport.com. This centralized credit reporting group does not require consumers to subscribe to monthly credit monitoring service or pay a fee to access their reports.
Consumers with poor credit will usually have a better chance of obtaining approval for secured loans vs. unsecured loans. This is because secured financing is backed by collateral that can be sold if debtors default on their loan. If the sale of the asset does not satisfy the balance of the note, creditors can obtain a judgment for the balance. Creditor judgments remain on credit reports until fully repaid and can prevent borrowers from obtaining financing of any type in the future.
Debtors who have lost their home to foreclosure, obtained a deed in lieu or short sale, or filed for personal bankruptcy within the previous two years will find it next to impossible to obtain secured loan financing through traditional lending sources.
One option for bad credit borrowers is to seek out financing through hard money lenders. This type of loan is provided through private investors or investment groups and is primarily used to purchase real estate, investment properties or to start or expand business ventures.
Hard money lender real estate loans are not cheap. It is not uncommon for investors to require a down payment of 40-percent or more and assess interest rates of 18- to 25-percent. Borrowers who enter into hard money financing should strive to refinance mortgages through a conventional lender within a year or two.
Bad credit borrowers who need to purchase a car may need to obtain financing through 'buy here, pay here' dealerships. Borrowers are generally required to provide a down payment of 20-percent or more and submit payments on a weekly basis.
Buy here, pay here secured loans are assessed a higher rate of interest. Borrowers should give careful consideration to this type of financing. Cars are often overpriced; leaving borrowers owing more than the vehicle is worth and making it difficult to sell later on. However, if borrowers desperately need transportation, 'buy here, pay here' secured loans can help debtors establish or repair credit.
Debtors must read the fine print of loan contracts before signing on the dotted line. It is also important to calculate the true cost of the asset and determine if it is truly a necessity or if it can be purchased after borrowers have time to improve their credit history. Oftentimes, entering into bad credit secured loans causes additional credit damage and can lead to repossession of the purchased property.
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