Obtaining new credit or building credit can be incredibly difficult in the beginning, or when you’ve experienced previous financial hardship. If you’re having trouble obtaining unsecured loans, you can always try applying for secured lines of credit instead. Of course, some secured lines of credit, such as mortgages, are common for people of all financial backgrounds, not just those struggling to build good credit.
A secured loan is any line of credit that requires some kind of collateral as assurance that the lender will not lose money. With a home mortgage, the house serves as collateral. The same case goes with auto loans. When you purchase an automobile with financing, your vehicle can be claimed by the lender if you default on payments. Even home equity lines of credit use the equity acquired in the piece of real estate over time as assurance that the loan will be repaid one way or another.
Who Offers Secured Loans?
A large variety of financial institutions offer secured loans. Banks may offer secured loans using a savings account or certificates of deposit (CD) as collateral. Credit Unions can offer secured lines of credit for their members that may have less than great credit. Online lenders also offer secured loans, but many of them offer them at the cost of very high interest rates.
Secured Credit Cards
Other kinds of secured loans, such as secured credit cards, can help specifically with attempts to build good credit. Typically, credit cards are unsecured, meaning your approval for a line of credit is heavily dependent upon your credit score (your creditworthiness rating in other words). People struggling with bad or no credit may only be approved for unsecured credit cards with incredibly high interest rates, or they may be denied altogether.
Companies who provide secured credit cards require the cardholder to provide a deposit of a predetermined amount so that if consumer defaults on payments, that deposit can be used as collateral. Interest rates with these kinds of cards are typically much lower. Of course, there are a variety of offers available with different terms, deposit requirements, and interest rates, so you’ll want to shop around if you think a secured credit card is a good option for you.
Moving To An Unsecured Card
The whole point of a secured card is to build your credit up enough that your lender will offer to transition you to an unsecured card. Maintaining unsecured credit cards will allow you to build your credit even further so that you can qualify for lower interest rates and better terms on future loans.
Other Secured Lines Of Credit
Businesses often use secured lines of revolving credit to support their plans for growth or get them through economic slumps. The company’s inventory or accounts receivable are used as collateral. Businesses can withdraw as much as they need and repay the balance as often as they would like up to the limit granted by the lender and the loan term. Often, at the end of a loan term of ten years or so, companies will be given the option to renew the line of credit. This is completely dependent on their past payment history and credit rating, of course.
Home Equity Loans
Another secured line of revolving credit for personal use is the home equity loan. Most homes located in a growing market will increase enough value to serve as collateral for a home equity loan. This is in addition to the existing mortgage on the property since the original mortgage uses the value of the home at purchase time for collateral.
Homeowners will pay an interest rate based on the available loans at the time and their personal credit rating. They can withdraw as much money from the line of credit as needed up to the agreed upon credit limit based on the amount of home equity.
Title loans use a vehicle title as collateral. These are short-term loans with usually high interest rates. An individual must surrender his/her physical title and allow the lender to put a lien on the vehicle. Once the loan is repaid, the lien is removed and the title hard copy is returned to the borrower. Title loans are at high risk and not recommended. They are most commonly used in emergency situations with a short turn around.
Deciding Which Secure Loan Is For You
When choosing a secured loan you’ll need to decide on your loan goal first. If your goal is just to improve your credit over time, you may consider applying for a secured credit card that will eventually transition you over to an unsecured credit card.
If you’re looking for more money to finance a large project or pay off high interest debt, take a look at home equity loans. Of course, your home will have to have enough accrued value in it to qualify you for this type of line of credit.
And, if a vehicle or large personal property item is in your future, you may choose special financing for that vehicle or other personal property. But, you will want to make sure you are in the right financial position to afford the loan so that your vehicle isn’t repossessed, and your credit rating isn’t further damaged.
Lastly, if you are a business owner, secured revolving lines of credit can be incredibly useful in helping your business grow, expand, thrive, and survive during slow periods, especially for those companies that feature more seasonal goods or services.
Whichever secured loan you’re in the market for, make sure you take your time to do the research and explore your options so you can ensure that you are getting the best repayment terms and lowest interest rates you can. Myriad lenders are available online, and all vary somewhat in the kinds of terms they offer and the interest rates they are willing to provide. These loans are great options for people working into building more credit or rebuilding from past negative financial circumstances.