out of luck. This isn’t necessarily the case. While most personal loans are unsecured, secured personal loans can be a great option for borrowers with poor credit.
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What is a secured personal loan?
When you apply for an unsecured personal loan, the lender will look at things like your credit score, debt levels, and income. If your credit score doesn’t meet their criteria, they probably won’t offer you a loan with favorable terms.
Some lenders, however, offer secured personal loans. These loans require that you pledge collateral equal to the loan amount so that the lender doesn’t face as much risk with the transaction.
The advantage of a secured personal loan is that you can still borrow money to meet a financial need. Also, paying off a secured personal loan can help boost your credit score.
The disadvantage of these loans is that you risk losing an asset if you don’t make your loan payments. You can also further damage your credit with a default. Finally, some unsecured personal loans have higher interest rates and additional fees.
What you can use to secure a personal loan
When you take out a secured personal loan, you must have something to put up as collateral. Most people use such things as cars, household goods, and savings to secure a personal loan.
Secured Auto Loans
Before you look for a personal loan using your car as collateral, examine your current budget and auto loan terms. If you have an auto loan at a high interest rate, your best bet might be to refinance your auto loan with more favorable terms.
Refinancing your car loan can get you a lower monthly car payment, which will free up money in your monthly budget. This is a good choice if interest rates have dropped since you purchased your car and your credit has improved.
If you have some equity in your car, you might be able to get cash-out refinancing. This means that you take out a new loan, which replaces your old auto loan, and receive some cash back based on your the value of your vehicle.
It’s important to understand the difference between securing a personal loan with a car and taking out an auto title loan. A secured personal loan will have reasonable interest rates, while a car title loan will charge you annual percentage rates (APRs) of 300% or more.
If you use a vehicle to secure a personal loan, read the fine print. Some lenders will require you to purchase additional insurance and designate them as a named insured on your policy. Include these additional requirements when calculating the actual cost of your loan.
Other lenders might allow you to use household goods to secure a personal loan. This could include expensive furniture, electronics, and recreation equipment. If you own a boat or an RV, either of these might be assets that could secure a personal loan. Just remember the extra caution on insurance.
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