Everyone knows obtaining secured loans with poor credit is harder than if you have a good credit history. While it is best to clear derogatory credit and take steps to improve FICO scores, there are times when obtaining a loan is an absolute necessity. With a little research and determination, borrowers can locate bad credit lenders willing to give them another chance.
Secured loans utilize some type of collateral to secure the debt. Collateral can include houses, vacant land, automobiles, water craft, or business assets such as the physical building or business equipment. Some bad credit lenders will require borrowers to obtain a co-signer, while others will use the asset as financial security.
Before applying for any type of loan, borrowers should review their credit reports from each of the three major credit reporting bureaus. These include: Trans Union, Equifax and Experian. In addition to reviewing credit scores, lenders also look at borrowers’ income to debt ratio, past due payments, delinquent accounts, written-off accounts, bankruptcy filings, and the number of hard inquiries.
Every time debtors apply for credit a hard inquiry is reported and remains on credit reports for two years. The higher number of hard inquiries, the less likely a lender will approve a loan application. Debtors should strive to keep hard inquiries to a maximum of three per year.
Individual borrowers can obtain a free copy of their credit report each year through AnnualCreditReport.com. This company does not require individuals to subscribe to a monthly monitoring service or pay fees to access their credit reports.
Debtors with bad credit typically have a better chance of obtaining approval for secured loans than unsecured loans. Since secured loans are backed with collateral, creditors can repossess assets if borrowers default on the loan. Assets are sold to pay off the outstanding balance and obtain a judgment or creditor lien if selling the asset does not cover the full amount.
Individuals who have filed bankruptcy, lost their home to foreclosure, or entered into a deed in lieu or short sale agreement, may find it nearly impossible to obtain secured loans through conventional banks or credit unions.
One option for unqualified borrowers is to obtain financing through a hard money lender. Hard money loans are sometimes used when borrowers with bad credit want to buy a house. Hard money lender real estate loans can be obtained through private investors or investment groups.
Hard money loans are not cheap. Most investors require borrowers to submit a down payment of 40-percent or more and charge interest rates upwards of 25-percent. Borrowers should strive to refinance mortgages through a conventional mortgage lender within one to two years.
Debtors with poor credit who need to buy a car should investigate ‘buy here, pay here’ car dealerships. This type of secured loan usually requires borrowers to provide a down payment of 20-percent or more and submit payments on a weekly or bi-monthly basis.
Careful consideration should be given to ‘buy here, pay here’ secured loan contracts. These car dealers typically charge poor credit buyers higher prices for the automobile, along with high interest rates. Borrowers often owe more than the car is worth, making it difficult to sell at a later time. On the flip side, ‘buy here, pay here’ secured loans can help debtors establish or repair their credit.
The Internet is a good resource for comparison shopping secured loans for people with bad credit. Always read the fine print of loan contracts, ask plenty of questions, and calculate the true cost of the intended purchase. Otherwise, entering into bad credit secured loans could cause further damage to your credit and lead to repossession of the purchased property.