Those with poor credit scores face a hard time proving they've gotten better at managing their finances, since they're too risky a bet for most lenders. A secured loan can be the best option to rebuild credit, because it removes much of the risk from the equation. The borrower puts up her own assets or funds, and the bank makes a loan using that as collateral and reports the payments to the credit reporting bureaus.
If you have assets like a home or paid-off vehicle, you may not have a problem getting a secured loan from your bank even if your credit is poor. Because the security for the loan is something of value that you presumably won't want to lose, the risk to the lending institution is smaller. You'll pay a higher interest rate than someone with better credit, however, and your borrowing limit likely will be less.
Your money can serve as collateral for secured loans -- but you'll have to agree to keep it under lock and key until the time is right. Some secured loans require you to place funds in a savings account or certificate of deposit that the financial institution holds until you've paid the balance of the loan. Another option is a credit builder loan. This puts the borrowed amount into a savings account or CD. You repay the bank monthly as agreed out of your own savings or checking account, and receive the loan proceeds once the final payment is made.
Banks and Credit Unions
Some banks offer secured loans to existing and new customers. Many credit unions offer loans to customers secured by other deposits, but you need to be a member of the credit union to participate. If you find an attractive offer at a credit union you don't belong to, you'll need to apply for membership and be approved before applying for the secured loan. With both banks and credit unions, you may have to back the loan with money deposited in a savings account or with CDs. Alternatively, the loan itself may be placed into a restricted savings account or CD, and made available only once the loan is paid off.
Payday lenders may offer a short-term loan secured by a postdated check that you provide at the time the funds are disbursed. If you don't come back to repay the amount borrowed in cash, the lender deposits your check. These lenders are regulated at the state level, so their prevalence and terms vary depending on where you live. They don't require a credit check, so as long as you have a job and a stable bank account you're generally approved. However, the fees can be excessive -- typically $15 per $100 borrowed over a two-week period. That, combined with the short loan term, make it a dangerous option for most borrowers.
- Money One Federal Credit Union: Share-Secured Loan
- St. Mary’s Bank: Credit Builder Program
- Wells Fargo: Types of Secured Loans and Lines of Credit
- GTE Financial: Secured Collateral Loans
- BB&T Bank: Deposit/Investment Secured Loan
- State Department Federal Credit Union: Don’t Dip Into Your Savings
- Federal Trade Commission: Payday Loans