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Secured loans with bad credit

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Secured loans with bad credit

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Last reviewed on 22nd March 2022

There are many options to raise capital, with secured loans being a popular choice. Securing a loan against your property does have advantages but it also carries risks that you must consider before applying.

If you’re applying for a secured loan with bad credit, the risks are even higher. For this reason, it’s highly recommended that you speak to an expert before applying.

We’ll cover everything you need to know on how to get a secured loan, regardless of your credit history. Our advisors can also answer any questions that you may have.

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Can I get a secured loan with bad credit?

Although getting a secured loan with bad credit isn’t easy, it is possible. Furthermore, there are lenders that specialise in providing secured loans to applicants with poor credit.

Secured loans are possible with the following credit issues:

  • Late payments
  • Defaults
  • CCJs
  • IVA
  • Debt management plans
  • Bankruptcy
  • Repossession

How does it work?

Lenders will also assess your current financial affairs to check if you’re eligible. For instance, if you have an existing mortgage and are behind on payments, then lenders will be reluctant to lend.

A secured loan will add another monthly outgoing to your list of expenses. That’s why lenders need to check whether or not a secured loan will be affordable.

In comparison, if you’re up to date on all of your payments you’ll have more lenders you can approach. Lenders also treat each credit issue in a different manner. For instance, applying for a secured loan with a CCJ is completely different from having an IVA.

Check your credit files

It’s a good idea to first check your credit file. Websites such as Experian are a good place to start. You can also use websites to give you all of your credit reports in one place.

Your credit report will highlight exactly what lenders will see during your assessment. This will give you a better understanding of your credit file before you apply. Our advisors can also help you with this if you’re unsure of what to do.

How will bad credit affect my secured loan?

Secured loans from mainstream lenders are different to those from specialist lenders. Mainstream lenders typically offer mortgages and secured loans to those with clean credit. That being said, you may still be eligible.

Lenders that offer secured loans to applicants with bad credit usually:

  • Have higher rates
  • Charge higher fees
  • Have a limited range of loans
  • Are less flexible in their assessments

Will I need a specialist lender?

If you have adverse credit, it doesn’t mean to say you’ll only qualify with a specialist lender. You may qualify for a secured loan with a mainstream lender. Nonetheless, it’s important to understand the differences before applying.

What you don’t want to do is apply with a mainstream lender until you’ve been advised to by an experienced broker. Although you may qualify for a mainstream loan, it’s always best to check if you qualify beforehand.

If you are declined for any given reason, it will typically leave a mark on your credit file, which is the last thing you’d want.

ask a mortgage broker

Do lenders charge higher rates because of poor credit?

Although it’s common for specialist lenders to charge more, they do so because of the risk involved. That being said, some specialist lenders do offer competitive rates, even with severe credit issues.

Choosing a shorter loan term can also make the overall cost of your loan cheaper. This is because you’d be paying less interest overall. The only disadvantage to this is that your monthly payments will be higher as a result.

Secured loans can also be referred to as second charges. This is because your existing mortgage provider already has a charge on your property. As a result, lenders often charge higher rates than a mortgage, simply because of the additional risk they’re taking.

Secured loans don’t always have to be secured against your own home. If you have a buy to let property, you may be able to secure the loan against that instead of the home you live in. In doing so, it significantly minimises your risk.

Learn more: What is a buy to let secured loan?

How do lenders assess secured loans with bad credit?

If you have bad credit, lenders will assess your loan application using the following factors:

  • Your property value
  • The amount of equity you have
  • Details of any other secured loans on your home
  • Your income and outgoings
  • Whether the loan is to be secured on a residential or buy to let property
  • The severity of your credit issues and when they took place

Having bad credit won’t always affect the amount you can borrow but in some cases, it can. This is because a credit check is only part of a loan assessment.

The main incentive for lenders is that they’re able to secure the loan against your property. This means that if you default on payments, lenders can use your home as collateral to repay the loan.

The largest factor in the loan amount you’re offered will depend on the details surrounding your property and not just your credit history.

Lenders need to be sure that your property has enough equity so they’re able to secure their loan against it. This is because if you already have a mortgage, your existing lender has a legal right to any capital before any other lender. For this reason, lenders that offer secured loans need to be sure that providing you with a loan is viable.

Are secured loans with bad credit risky?

As with any type of loan, there are risks involved. Secured loans can be very high risk as you’re essentially using your home as security. This means that if you default on the loan, you could lose your home.

If you’ve had previous financial difficulties, you’ll need to be sure that a secured loan is the right choice. This is because any further credit issues could lead to potentially losing your home.

Lenders will carry out their assessments and your advisor will also check that your affordability meets the criteria of the loan. Nonetheless, you also need to be confident that any loan repayments can be met.

During your assessment, lenders will carry out stress tests. It’s a good idea to also consider whether you’d be able to repay the loan if you underwent some sort of financial stress.

What is a stress test for a loan?

Examples of stress tests include whether you’d be able to repay the loan if there were hikes in interest rates or if you were unable to work. You should also make sure you consider ‘worst-case scenarios’ and base your decision on a calculated risk.

If your finances did take a turn for the worst, your credit file would also take a huge hit in the process. This is especially true if your home is repossessed.

There are other alternatives to secured loans such as a remortgage. It may be easier to remortgage with bad credit rather than getting a secured loan. The only downside to this is that the rates offered may be higher than your current deal.

Read more: How to remortgage with bad credit

Will I need a specialist because of my credit history?

Speaking to an experienced advisor is often recommended, even for applicants with good credit. If you have bad credit then speaking to an advisor is a must. This is because some lenders only offer their services through qualified brokers. As a result, you’ll have access to many more lenders, which also increases your chances of approval.

Brokers that are experienced in providing secured loans should be able to select suitable lenders. For instance, some lenders are better suited if you’ve been discharged from bankruptcy, whereas others are suited for a history of defaults.

Trying to find the best deals on your own is extremely difficult. Choosing the best deal goes further than simply finding the lowest rate. There’s so much more to think about such as fees, the length of the loan and of course, the small print.

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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.