Collateral Loans With Bad Credit: How to Get Approved and What to Know

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:

• Home mortgages – Your home serves as collateral on the mortgage.

• Auto loans – The vehicle you’re financing acts as collateral.

• Secured personal loans – You pledge an asset like a car as security on the personal loan.

• Secured business loans – Business assets or equipment can collateralize loans.

• 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:

• Shop specialized lenders that work with bad credit borrowers. Avoid prime lenders with strict requirements.

• Highlight stable income and employment when applying, even if your credit is lacking.

• Put up the most valuable collateral you can part with to encourage approval.

• Accept shorter loan terms if available to demonstrate ability to repay quickly.

• Make a large down payment on asset financing to reduce the borrowed amount.

• Bring a cosigner with better credit to show a willingness to commit.

• 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.