Having bad credit can make getting approved for a personal loan difficult. But by using an asset as collateral, you may improve your chances even with poor credit. Secured collateral loans allow borrowers with low credit scores to qualify for financing that might otherwise be unavailable.
Below we cover everything you need to know about getting collateral loans with bad credit, including:
- What collateral loans are
- Benefits of collateral loans for bad credit
- Collateral options to secure a loan
- Lenders that offer collateral loans
- Tips for approval with poor credit
- Risks and downsides to understand
Follow these tips to boost your odds of securing a collateral loan for bad credit borrowers,
What Are Collateral Loans?
Collateral loans, also known as secured loans, require borrowers to put up an asset as security on the debt. If the borrower fails to repay the loan, the lender can seize the collateral to recoup losses.
Common examples of collateral loans include:
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Home mortgages – Your home serves as collateral on the mortgage.
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Auto loans – The vehicle you’re financing acts as collateral.
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Secured personal loans – You pledge an asset like a car as security on the personal loan.
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Secured business loans – Business assets or equipment can collateralize loans.
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Home equity loans – Your home’s equity secures the loan.
Pledging an asset gives lenders more confidence in issuing loans to higher risk applicants – including those with poor credit. While unsecured loan qualification depends heavily on credit scores, collateral reduces a lender’s risk, increasing approval odds for bad credit borrowers.
Benefits of Collateral Loans for Bad Credit
Securing a loan with collateral offers several advantages for those with low credit scores:
Higher approval chances – The collateral provides security to offset poor credit, boosting approval odds. Lenders focus less on credit scores.
Lower interest rates – Secured loan rates are generally lower than unsecured loans for the same borrower. The collateral reduces the lender’s risk.
Larger loan amounts – Lenders may approve bigger loan amounts when secured by a valuable asset.
Fast access to funds – Collateral loans can fund more quickly than unsecured loans that require lengthy underwriting.
Help rebuild credit – Making on-time collateral loan payments shows responsibility and can help improve credit.
For borrowers with poor credit, a collateral loan may offer the only viable path to gaining access to financing. Just be sure to only pledge assets you are comfortable potentially losing.
What Can Be Used as Collateral?
You have several options when it comes to assets that can collateralize a loan:
Vehicles – Cars, trucks, motorcycles, RVs, boats. Lenders will appraise the vehicle and loan up to a percentage of its resale value.
Real estate – Primary home, secondary/vacation properties, investment properties, vacant land. The property value determines how much you can borrow.
Savings accounts – Certificates of deposit (CDs), money market accounts, cash. Lenders may approve loans up to the account balance.
Insurance policies – Certain policies like whole life insurance have cash value that can be borrowed against.
Securities – Stocks, bonds, mutual funds. Borrow against a portfolio’s value.
Make sure to only use assets you own 100% and are comfortable risking. Some retirement accounts can’t be used as collateral. Also consider the difficulty of replacing the asset if seized – homes and vehicles are harder to recover than savings.
Where to Get Collateral Loans With Bad Credit
Several lender options exist for secured loans if you have poor credit.
Banks – Large national banks like Wells Fargo offer secured personal loans to checking/savings account holders using their deposited funds as collateral.
Credit unions – Member-owned credit unions provide low rates on auto loans and personal loans secured by deposits.
Online lenders – Online-only lenders like Upgrade and LendingClub facilitate collateral loans nationwide using cars and savings accounts as security.
Peer-to-peer lenders – P2P platforms like Prosper connect individual investors and borrowers directly for personal collateral loans.
Mortgage lenders – Banks, credit unions, and online lenders offer home equity loans and cash-out mortgage refinancing using home equity as collateral.
Hard money lenders – Specialty lenders provide real estate and business loans secured by property and other valuable assets. Higher rates than traditional lenders.
Cast a wide net and explore multiple collateral lending options to find the best fit. Compare rates, terms, fees, and collateral requirements.
Tips for Approval on Collateral Loans with Bad Credit
Getting approved for financing with poor credit scores takes effort. Follow these tips when seeking collateral loans:
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Shop specialized lenders that work with bad credit borrowers. Avoid prime lenders with strict requirements.
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Highlight stable income and employment when applying, even if your credit is lacking.
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Put up the most valuable collateral you can part with to encourage approval.
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Accept shorter loan terms if available to demonstrate ability to repay quickly.
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Make a large down payment on asset financing to reduce the borrowed amount.
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Bring a cosigner with better credit to show a willingness to commit.
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Explain past credit issues in your application to provide context.
With preparation, you can show lenders you’re committed to repayment even with bad credit, boosting the chances of getting approved.
Risks and Downsides of Collateral Loans
While beneficial in many ways, collateral loans do come with drawbacks to weigh:
Risk of repossession – Defaulting on the loan means the lender can seize and sell your pledged asset. You could lose your vehicle, home, or other collateral.
Paying up if asset declines in value – If the asset drops in value but you still owe money, you must pay the balance – even if it means putting in extra cash.
Complex application – The collateral must be appraised and approved, complicating and lengthening the application process.
Potential prepayment penalties – Some lenders charge fees if you pay off a secured loan early. Make sure to ask about prepayment penalties before signing.
Credit damage if repossessed – Having collateral repossessed severely hurts your credit history and scores, creating additional future borrowing challenges.
Never take using collateral lightly. Avoid pledging assets you can’t bear to part with or need for daily life. Only use collateral loans as a last resort option.
Alternatives Beyond Collateral Loans
If you have bad credit but are uncomfortable putting up an asset as collateral, consider these alternative borrowing options:
Cosigned loans – Adding a cosigner with good credit may help you qualify and get better rates on an unsecured personal loan.
Credit builder loans – These loans improve credit by reporting payments to bureaus as you repay them over time.
Payday alternative loans – Offered by credit unions, these provide small loans at lower rates than payday lenders.
Peer-to-peer lending – Borrow from individual investors; some may overlook credit scores.
Credit card – Easier to obtain than loans and can help build credit through responsible use.
Employer loan – Some companies offer low-rate personal loans as a job benefit.
Loan modifications – Your existing lenders may agree to modify loan terms to be more affordable.
Explore all options thoroughly before deciding to use valuable property as collateral. Weigh the risks and benefits closely given your situation.
Key Takeaways on Collateral Loans with Bad Credit
Securing a loan with collateral can improve the chances of getting approved for bad credit borrowers who would likely be declined for an unsecured loan. Key points to remember:
- Cars, real estate, savings accounts, and other assets can collateralize loans.
- Specialty lenders more readily approve applicants with poor credit for collateral loans.
- Match the asset pledged to the loan amount needed to avoid overcollateralization.
- Prepare your application meticulously to offset weaknesses like low credit scores.
- Weigh the repossession risks carefully before moving forward with a collateral loan.
With smart collateral choices and an informed application approach, access to financing is possible even with less-than-ideal credit. Proceed carefully and use collateral loans only when you have no alternatives.
How secured loans work
At their core, secured loans work similarly to any other type of installment loan.
- The first step is making sure you meet the lender’s eligibility requirements. Here, the lender will likely want to assess the value of the asset that you’re putting up as collateral in addition to looking at more standard criteria, such as your credit score and debt-to-income ratio (DTI).
- If you qualify, you’ll be approved for the loan. Once you sign the loan agreement, the lender will place a lien on your collateral, giving it the right to repossess your collateral if you stop making payments. After all the paperwork is in place, the lender will distribute the loan funds to you.
- Once you close on the loan, begin making regular repayments. Installment loans are typically repaid every month, with regular reporting to the credit bureaus.
- Continue making payments until your loan has been repaid in full. Then, the lender will remove the lien from your collateral. After the lien has been removed, the lender no longer has the right to take that asset from you.
Best Egg: Best secured loan for homeowners
Ratings and reviews are from real consumers who have used the lending partner’s services. User ratings:
Ratings and reviews are from real consumers who have used the lending partner’s services. APRs
5.99% to 29.99% Loan amounts
$2,000 – $50,000 Loan terms
36 to 84 months Origination fee
0.99% – 8.99% Collateral required
- Does not use home itself as collateral
- Extended loan term available
- Competitive APRs for excellent-credit borrowers
- Requires an origination fee
- Must be a homeowner
- May default if you sell your home before loan is repaid
Best Egg’s Secured Loan + Homeowner Discount is a unique loan that uses your home’s fixtures as collateral. Eligible fixtures could include bathroom vanities, built-in cabinetry and other elements permanently attached to your home.
Like any secured loan, this product comes with some risk. Best Egg will place a lien on your fixtures while your loan is open. If you sell your home before paying off your loan, you could default. If this happens, your entire loan balance could be due immediately. Best Egg may also repossess your home’s fixtures from the new owner.
Still, this loan may be worth it. Best Egg states that borrowers may save an average of 20% on their APR by using collateral (as opposed to getting an unsecured loan). Just be sure that you understand how this product works before signing on the dotted line.
To learn more, read our full Best Egg personal loan review.
Although Best Egg uses your home’s permanent fixtures as collateral, it doesn’t need to appraise those fixtures’ value. Instead, Best Egg will review your credit history and home equity to ensure you qualify.
You must also be a U.S. citizen or permanent resident living in the U.S., the age of majority in your state and have a personal checking account, email address and physical address to apply.
Best Egg loans aren’t available in the District of Columbia, Iowa, Vermont, West Virginia or U.S. Territories.
Collateral Loans for Good and Bad Credit.
FAQ
Can I get a loan with bad credit but collateral?
Which loan is guaranteed with collateral?
Can you get a secured loan with a 500 credit score?
What is the minimum credit score for a secured loan?
Can you get a personal loan with bad credit?
In addition to bad credit personal loans, you may have other options for borrowing money: No-credit-check loans: True to its name, a no-credit-check loan doesn’t include a hard credit check as part of the application process. The financial institution may look at other factors such as proof of income to verify your ability to repay the funds.
What is a collateral loan for bad credit?
A collateral loan for bad credit is a secured to collateral or an asset you own. This may be a house, car, cash in a savings account or certificate of deposit (CD), stocks and bonds, insurance policies, jewelry, or fine art. When you apply for a collateral loan, the lender will find out the fair market value of your collateral.
Do personal loans have collateral?
Personal loans, though, don’t always have collateral. Collateral loans may be a good option if you have bad credit or want to qualify for a lower interest rate. However, they’re not a good fit for every borrower, so carefully consider the pros and cons of these loans before accepting one: Easier to qualify.
Are collateral loans a good option?
For individuals with poor credit scores or those looking for larger loan amounts, collateral loans can be a good option since they lower the lender’s risk and may come with lower interest rates. However, securing a loan with collateral means you could lose your property if you default.