Secured Loans for Bad Credit

Updated: April 09, 2024 Author:

Key Takeaways: Secured loans for bad credit let you borrow from £10 to £100,000. Homeowner loans provide the highest amounts with the lowest interest rates using a direct lender. Logbook loans let you borrow between 50% to 60% of your car’s value, and for small amounts, pawnbroker loans let you borrow as little as £10 using an item of higher value as collateral. 

    What are Secured Loans and Why Does a Credit Rating Matter

    When you have bad credit, lenders deem you a higher risk. Secured loans for bad credit applicants are appealing because they attract lower interest rates. That’s because you’re removing the risk from the lender and placing it on you. Borrowers using secured loans are putting something of higher value than the loan amount up as collateral. Personal loans are unsecured, providing little in the way of assurances to lenders.

    Secured Loan Types and How They Work

    Homeowner loans

    Homeowner loans are secured against your property, just like your mortgage. If you own your home outright, you can remortgage. If you’re still paying the mortgage, you could consider a second-charge mortgage – a type of home equity loan. These may be more suitable when you need to borrow a large amount. Direct lenders offering secured loans typically let you borrow between £5,000 to £100,000 with repayment terms of up to 20 years. Interest rates can vary from 11.7% to 46.5% APR with a 50% APRC. The inherent risk with these is your home valuation plummeting. It could leave you in negative equity. That’s when you owe more in debt secured on your home than the home is worth if it were repossessed. You could be homeless and still owe the debt.

    Logbook (V5) loans

    Logbook loans (or V5 loans) are less risky to you than homeowner loans as they’re secured against a motorbike, car, van or motorhome. If you need your vehicle for work, you could be in a difficult position if it were to be repossessed. With bad credit, vehicle loans could let you access up to 50% or 60% of the value of your vehicle using the logbook as security.

    Pawnbroker loans

    Pawnbroker loans tend to be for smaller value items like electronics, jewellery, and valuable collectable items like a Prada handbag. Pawnshops keep the item as security until the loan is repaid in its entirety. These tend to be short-term loans, repayable over 6 months  – sometimes longer depending on the amount being borrowed.

    The Importance of the APRC When Comparing Homeowner Loans with Bad Credit

    Long-term secured loans can be compared with the APRC (annual percentage rate of charge), which is different from the APR – that’s just the annual percentage rate. APRC applies to secured loans because they are long-term loans, with several fees – not just interest. Long-term unsecured loans only show an APR. The difference when comparing secured loans is that the APRC rolls all the fees like the product fee, introductory rate, commissions (if using a broker) valuation fees, and the fixed rate after the introductory period ends into a complete figure, giving an accurate reflection of the total cost of borrowing.

    Does Providing Security Mean I Don’t Need to Pass a Credit Check?

    There are two types of credit checks. A soft search and a hard search. Companies offering no credit check loans are really offering soft search loans. These are quotation searches that show lenders enough information and verify your identity and get an overview of your credit history. Soft credit checks are only visible to you, and don’t affect your credit score. They show enough information for a lender to get a thorough enough picture of your financial history to know if they could likely lend to you. It will show things like a CCJ, late payments, total debts, etc. Hard checks are when you apply for a loan and these can drop your credit score. Keep applications to a minimum. After a couple of loan refusals for an unsecured loan, it may be advisable to wait a few months before applying for a secured loan as each application results in a hard hit on your credit reports, lowering your credit score.

    Why are Secured Loans Easier to Get?

    Secured loans are easier to get because 100% of the risk is on the borrower. Lenders have the contract (loan agreement) on their side. If you fail to repay, they can sell the item used as security to recuperate the money owed. If they can get more than the outstanding balance on the loan, most will return the excess to you, i.e, you use your Xbox for a £200 loan, with a total amount repayable of £256, they sell for £359, they’ll keep whatever is owing from the £256 balance, paying you what’s left from the sale.

    You’ll always find with secured loans that the value of the asset used as security is higher than the loan amount. Lenders describe it as a loan-to-value (LTV) ratio. Rarely can you borrow 100% of the value of the asset used as security. Most LTVs for bad credit secured loans are lower than 75% LTV. It happens with small secured loans too. Pawnbroker loans can lend up to 75% of the value of an asset like an 18ct gold ring or an Xbox console.

    How to Get Approved for a Secured Loan with Bad Credit

    Getting any loan approved, regardless of your credit status, involves some form of a credit check. A soft search can be sufficient to verify your identity and confirm your address. Passing a credit check isn’t the hard part. The difficult part is proving that you can afford the monthly repayments. Lenders can’t approve a loan knowing that you can’t afford to repay it. To know you can repay, be prepared to provide proof of income.

    Also, check the eligibility of a lender before you apply because some have minimum age requirements and minimum income levels, and some will only consider wages earned, excluding top-up income from benefits. You need to know these things before applying because once you apply, the hard hit on your credit report can make it more difficult to be approved using another lender later.