You have options when it comes to bad credit loans, and all of them are going to fall into one of two categories: a secured loan or an unsecured loan. Most lenders aren’t going to tell you exactly which one of those you’re getting, though, and they have the power to really impact how your loan shapes up. That’s why it’s important to know what type of loan falls under what category, and what that means for you as a borrower.
The Basic Differences
If you’re looking for a simple, blurb-style definition to help you figure this out, just remember that secured loans need to be secured with something. Ask yourself if you’ve put up some sort of collateral to get the loan. If the answer is yes, you have a secured loan. Otherwise, your loan is probably unsecured.
The reason secured loans are called “secured” is because they come with security for the lender, meaning that the lender isn’t just lending out to you based off of your financial history and the assumption that you’ll pay back.
Instead, secured loans use collateral to help ensure that the borrower has a reason to pay back the loan. Loans like car title loans, home equity loans, and even pawns are all types of secured loans because they all use something that has value in it as security against which you can borrow.
Unsecured loans are those that don’t require that kind of collateral. They’re the ones that will lend to you based off of the assumption that you will repay, and they don’t require you to put up anything to get the loan. Since they don’t offer security for the lender, unsecured loans tend to find other ways of ensuring they recoup their value, such as higher interest rates.
Secured Loan Benefits
If you’re looking for a bad credit loan, give a secured loan serious consideration. The standard personal loan model is with an unsecured loan, but the standard personal loan model is also based on the assumption of a strong credit history. A secured loan gives borrowers with bad or no credit history an alternative that won’t break the bank.
Since secured loans have collateral backing them, lenders don’t have as much inherent risk tied up in the loan. That means that they are able to lend out without requiring as much on the part of the borrower, like immaculate credit history or otherwise steep interest rates.
Depending on the type of secured loan you get, the perks could include:
- A loan without a credit check
- Immediate cash
- An extended repayment period
- Lower interest rates
- More flexible loan options
Loans like title loans and any type of pawn are immediately secured by the value of what you’re putting into them, which means you’ll be able to get your loan money fast.
Loans with a bigger item backing them, such as home equity loans, are going to give you the chance to borrow more and to repay gradually at lowered interest rates.
The security of using your home, car, etc. as backing for the loan doesn’t impact how you interact with the collateral – you still drive your car with a title loan, you still live in your home with an equity loan. They just work as security to back your loan. The only risk comes when you stop repaying all together.
Types of Secured Loans for Bad Credit
Anything that uses an item of value as backing can be considered a secured loan, but there are a few that are especially good for bad credit, including:
- Title loans (boat, motorcycle, and car)
- Home equity loans
- CD/Savings-secured loans
- Pawnbroker loans
These are all determined by the value of the goods backing them, which means that your credit doesn’t have to play a big part in whether or not you qualify for the loan or what the loan, itself will look like.
There are a couple of catches, though. First, the item usually has to be paid off to qualify as something that can back a secured loan. A house, for example, where you’re still paying down the mortgage, doesn’t technically belong to you yet. Rather, it’s the bank’s property until you’re done paying it off. Since it’s not your personal property, you don’t actually have the right to put it up as collateral.
That means that cars, homes, even jewelry that’s going to be used for collateral for a secured loan have to be fully owned by you to qualify.
The other catch with these secured loans is that, should you ever lose your ability to repay or ever stop paying off your loan, your collateral could be forfeit to your lender. This is rare, and more often than not if your ability to pay changes due to unforeseen circumstances (like job loss) your lender will work with you directly to create a settlement or alternate plan.
Stopping loan payments and taking no action, though, could mean losing whatever collateral you’ve invested.
Unsecured Loan Benefits
Unsecured loans are low-risk for the borrower, and that’s generally their biggest draw. Since no collateral is tied up in the loan, there’s nothing for the borrower to lose in terms of important material possessions. Unsecured loans can still reflect negatively on credit reports if they’re not paid, but something like your home won’t be forfeit due to non-payment.
Unsecured loans are what most people generally think of when they think of loans – the kind where the borrower gets money in exchange for eventual repayment with interest, generally with a written loan agreement as the primary or only source of security for the loan.
Unsecured loans are more difficult to get with bad credit, but they’re not impossible. Unsecured loans are based on the promise of eventual repayment, and which is why those with stronger credit history and history of repayment are seen as lower risk for these types of loan.
Unsecured bad credit loans are available though, and they can even be a good way to start rebuilding credit history. They will just have a few measures built in to help lenders ensure that they can recoup as much of their loan value as possible:
- Shorter repayment periods
- Higher interest rates
- Potential associated fees
None of that is inherently bad, though. In fact, with shorter repayment periods, many borrowers pay less overall interest in terms of dollars paid that with longer term secured loans. Bad credit unsecured loans are also generally smaller, overall, so they are easier and more manageable for those working on securing their overall finances.
Types of Unsecured Loans for Bad Credit
While any loan that doesn’t have collateral backing it is an unsecured loan, there’s a specific set focused for those with bad credit. These are ones that are designed to work specifically with borrowers that don’t qualify for traditional unsecured loans, and include:
- Short-term personal loans
- Payday loans
- Peer-to-peer loans
- Co-signed personal loans
Short-term personal loans are exactly what they sound like – personal loans with a short repayment period (generally a few months to a year). These are usually worth a few hundred to a few thousand, and often function like a standard personal loan but generally with a higher interest rate.
Payday loans are a different type of short-term personal loan, usually worth somewhere in the hundreds, wherein the loan amount is distributed immediately, and the borrower leave the lender with a post-dated check for the loan value, often for date a month or less away. If a payment plan is agreed upon, payment is generally due before the date on the check.
Though borrowers provide postdated payment for payday loans, they’re not considered secure since the check has no inherent value. If it bounced, for example, the lender would be out their money with nothing of value to use to actually recoup the loan money.
Peer-to-peer loans are, in some ways, a new type of loan that’s been on the rise as our lives become more digital and interactive. These are generally small loans made by peers through and online service, with repayment going directly to your peer lenders. Attracting peer-to-peer loan funds can be a bit of a challenge, as peer lenders choose where and to what causes to lend. They’re generally more forgiving, though, and based on a model wherein lenders and borrowers often change roles based on their present circumstances.
Co-signed personal loans are generally the most attractive option for those that can get them. These are personal loans that use someone else with favorable credit history to so-sign for the loan, so that lenders aren’t taking on a more risky borrower on their own.
Co-signed loans require a willing, credit-worthy participant to help the primary borrower out, but they also mean lower interest rates and longer payment periods. Co-signed personal loans are the bad credit cheat code to getting a standard personal loan, so long as the borrower has a cosigner whom they can trust and regularly work with.
Picking Your Bad Credit Loan
Deciding on the right type of bad credit loan for you is as much a matter of personal preference as it is anything else. Think about the amount you’re looking to borrow, how long you want to repay, what you have as potential loan collateral, who you know that may be a potential cosigner, etc. Looking at your available resources will help you determine what type of loan is right for you.
Bad credit borrowers also need to be familiar with how their credit scores could impact their ability to get a loan. Even amongst bad credit loans, a low enough credit score can knock a borrower out of qualifying range.
If your credit score is below about 500, it’s highly advisable that you consider a secured loan that does not require a credit check, such as a title or home equity loan. Companies that offer these loans without a credit check won’t pull your score at all, so you won’t have to worry about qualifying credit.
Do be wary, however. Not every title or home equity loan company does business without a credit check, and in some states like Ohio, a credit check is required for any loan. Ask your lender what will be required before you apply, so that you know what you’re getting from your loan before you put anything into it.
Alternatively, don’t be afraid to let your lender know that you have concerns about your credit history before you begin the loan process. Lenders are as interested in your business as you are in their loan, so they’re going to be willing to work with you from early on to get you invested in their product over one of their competitors.
Talking to a potential lender about their bad credit loan options will give you the chance to see if the programs they offer are right for you. You’ll get the chance to have a frank and honest conversation before the loan process begins, which will save you some time when it comes to actually start applying for your loan.
And while you might be looking for a fast solution to a pressing matter, take time to consider what you want your credit to look like coming out the other end of the loan. A loan is by no means a way to fix bad credit, but finding one with terms you can more easily manage is important to help ensure that this particular facet of your credit history shows strong repayment and good overall management.
You can even ask your lender if they have loans meant to help repair bad credit. Some offer loans for just that, which could serve to double the impact of your loan by getting you the money you need and helping you repair your credit for the future.
Those are the basics of secured and unsecured loans for bad credit. Now that you know what goes into each, all it’s going to take is a bit of shopping to find the perfect bad credit loan for you.