A secured loan is a good solution, if you need a loan but have bad credit. All it means is that you're offering some property the lender can take if you don't repay the loan. Might be a car, a house, a boat, a life insurance policy, a diamond ring, whatever. Giving them something for security makes lenders more confident about giving you a loan and less worried about your credit score. Some secured loans require no credit check at all, and in most cases you can keep using whatever you put up as security, living in your home, driving your car, earning dividends or interest on your investments, or whatever.
There are also unsecured loans, where you don't need to put up anything of value, but they can cost you more in interest. For example, at this company, you might be able to receive a loan up to $1000, even if you have no credit history, poor credit history or a bankruptcy in your past, as long as you have a job or other source of income and a checking account.
A secured loan also gives you a chance to start improving your credit score as you pay it back on time, as long as the loan will be reported to the credit agencies. The down side is that if you don't pay it back, you're at risk of losing whatever you put up as collateral to secure the loan, not to mention trashing your credit score even further. So don't take out more of a secured loan than you can afford to pay back, especially if you're risking a necessity like your car or house, but you already know that.
Secured loans come in all different kinds, depending on what property you have, what your credit is like, and how long you need the loan for.
HELOC or Home Equity Loans
If you have some equity in your house, try looking for a HELOC (Home Equity Line of Credit ) or a home equity loan. The difference is that a HELOC is like a credit card--you can borrow a little or a lot, whenever you want, pay it back, and do it again. A home equity loan is a one-time thing, for a certain amount, and when it's paid back, it's over.
They're not quite as complicated to get as a mortgage and they have lower closing costs, but they aren't as simple as some other loans either. With a HELOC, you'll probably need to pay an annual fee even in years you don't use the line of credit. The interest rate will be adjustable, but will probably be better than some of the other choices below. Check with a bank or credit union to find out about HELOCs or home equity loans, or if you're especially concerned about having a low credit score, you can also look online for lenders who specialize in offering them for people with bad credit.
Auto Loan Refinancing
If your car is close to being paid off, refinancing it is a possibility. If your credit is bad, you may want to go through an online broker who'll look for auto loans from a variety of lenders and let you compare which is the best deal. Search for bad credit auto loan refinancing, or something like that. The same can be done for a motorcycle, boat, or anything you'd finance similarly to a car.
Auto refinancing is different from a car title loan. Refinancing spreads payments out over many months or a few years, and the cost is usually cheaper too.
A car title loan can be short-term, maybe just a few weeks or months, or you may be able to get a longer term, but you can receive the money fast, in a few hours or a day or two at most. Car title loans are generally more expensive than the kind of loan you could get by refinancing, but a lot of times there's no credit check, so your credit score doesn't matter.
For an emergency when you have bad credit and need money immediately, and can't qualify for a payday loan, a car title loan is an option. Look in the local yellow pages for a car title loan place or search online. You can still keep driving your car, while you repay the loan. They only hold onto the title. In California and maybe some other places, they're also called pink slip loans.
A Secured Credit Card
Secured credit cards look and act like regular credit cards, except they're secured by money you put in a bank account, so you can be approved even with bad credit. A typical bank account requirement might be around $500. Since you're borrowing against money you already have, they're not a way to get extra cash in an emergency, but they're a good way to have the convenience of a credit card and build up your credit score again. But beware the ones with high fees. I wrote more information about them here.
Borrowing against your 401K
A lot of 401K plans will let you borrow up to 50 percent of the value or $50,000, whichever is less, with no credit check, and usually a fairly decent interest rate. Check with your employer or the administrator of your 401K to see if you're eligible. If you don't pay the loan back on time, there can be tax consequences, because it's like withdrawing money from the plan before retirement. Ask about stuff like what happens if you lose your job, because the loan may become due in full within a few months, and whether you can still contribute to your 401K while you have the loan out, because that could affect your taxes and matching contributions.
Borrowing against Whole Life Insurance
If your life insurance policy has built up a cash value, you can use it as collateral for a secured loan, and borrow against it even with bad credit. Contact your insurance agent to see what the interest rate will be and how it works. There may be some tax consequences, depending on your policy. If you don't repay the loan, the value of the loan plus any interest will be taken out of whatever the company pays out to your beneficiaries when you die, which may or may not be a big deal, depending on your situation.
Share Secured Loans or Stock Secured Loans
If you have assets like a certificate of deposit or stocks, you can use them for collateral without selling them or cashing them in, by getting a share secured loan or stock secured loan. You still earn interest or dividends on your money, and don't have any tax consequences or penalties for selling or early withdrawal. Search online, check with a local credit union, or you can also check with the broker where your stocks or securities are currently held. A stock secured loan is possible with no credit check and "no recourse," which means that even if the stocks fall in value and you decide to walk away because you owe more than the stock is worth, the lender can only take the stocks and can't come after you for the balance.
If you need a secured loan and don't have a car, real estate, stocks, savings, life insurance, or similar things of value, a pawn shop is an option for using other things as security, such as jewelry, musical instruments, a camera, electronics, and so forth. The difference is that you have to give up using whatever you're pledging for security until you pay the loan back. Pawn shop loans are generally "no recourse," which means that if you default, the pawn shop just keeps the item you left and can't demand any other money, but they make up for that by never loaning you anywhere close to the item's value, so you're generally better off paying back the loan, even if it's expensive.
7:21 p.m. March 12
You really need to think about the consequences of not paying back a secured loan, to make sure you'll be okay with that if some downturn occurs and you lose your job or have medical bills or something and can't pay it back. There's no point to risking your home or retirement unless it's necessary.
8:50 p.m. March 12
i dont get what no recourse means. don't they have the recourse of taking whatever you put as colateral?
11:01 p.m. March 12
Yes, but it means they can't take anything beyond that. It's a good thing, as long as the cost of the loan isn't outrageous, especially if whatever you're giving as security might decrease in value like a car or stock. It means they can take the item and sell it to pay back the loan, but if it doesn't sell for enough to pay off the loan plus interest, they can't sue you to get the rest of the money. It's their loss.
1:42 p.m. March 13
Lenders know that, of course, so they'll either loan you so little that the collateral is bound to cover the cost, or they'll charge enough in extra fees and interest that they'll make extra profit on loans that don't default.
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