How Secured Loans Can Help Your Credit

What Is a Secured Loan?

A secured loan is one that requires you to pledge an asset to act as a guarantee against the money you borrow. It may be cash the lender sets aside in a special deposit account, stocks and other investments, a vehicle or real estate. Whatever you use to back a loan, that security lowers the risk a lender assumes when it lets you borrow the money. In the event the loan goes into default, the lender wont have to take you to court to recoup its losses. Instead, the lender can take the collateral.

Because secured loans are less risky for lenders, you can get one even if you havent developed a positive credit history yet, or if you already have damaged credit.

In fact, there is even a type of loan thats meant for people who need to build or rebuild their credit. Its called a credit-builder loan, and usually comes in increments of $300 to $1,000. Credit-builder loans are unique because the lender deposits the loan balance into a savings account instead of giving you the money. You are expected to make fixed payments for a predetermined number of months.The lender reports your activity to the credit credit bureaus (Experian, TransUnion and Equifax). When the loan is satisfied, the lender will give you the total balance, which may include any interest you paid. In that way, credit-builder loans are not only a way to develop good credit, but will help you save money for the future.

Are Secured Loans a Good Idea?

To determine if a secured loan is worth exploring, your first step should be to review your income and expenses carefully and make sure the payments are doable. If paying hundreds of dollars every month will be a struggle or cause you to fall behind on essential bills, a credit-builder loan is not wise. But if you can easily afford those payments for the entire life of the loan and always pay on time, the secured loan will work to your advantage.

The two most common credit scoring models, FICO® Score☉ and VantageScore, both rank payment history as the most important factor in score calculations. Making on-time secured loan payments will go a long way toward building or rebuilding your credit.

Still, secured loans are not right for everyone. Exercise even more caution if youve had past difficulties with credit. There may be bad habits that need to be broken, such as charging more than you can afford to repay or not preparing for emergencies. Youre taking a great risk if you fall behind on a secured loan, and the last thing you want is for the lender to take your assets and leave you with worse credit than before.

Are There Other Options for Building Credit?

Secured loans arent the only method you can use to build or repair credit. There are other options you can use in conjunction with or even instead of them.

  • Apply for a low-limit credit card. A credit card issuer may take a chance on you if the limit is very low. Prove you can handle the account well by paying the balance in full and on time every month, and the issuer may increase the limit.
  • Get a secured credit card. As with a secured loan, you put down collateral on a secured credit card. In this case its a cash deposit, which in turn will likely become your credit limit. If you dont pay your bill, your card issuer simply keeps some or all of your deposit. Some credit card issuers will return the deposit to you and convert you to an unsecured card after youve made a number of on-time payments.
  • Become an authorized user. If you know someone who has a credit card and treats it right, you could ask to be added to the account as an authorized user. That persons account activity will appear on your credit report, thus helping your own credit history. As an account guest, you wont be liable for the payments or any resulting debt, but should work out spending limits and a reimbursement plan with the primary cardholder.
  • Open a loan with someone who has good credit. Becoming a cosigner with a person who has great credit can help jumpstart your own credit history. Both of you will be equally responsible for the loan, though, so it is essential that the payments are made on time. If they arent, the lender can pursue both of you for the debt.
  • Obtain a student loan. If youre a college student, positive payment history on federal student loans will help build your credit. Of course, never take out a student loan with the sole purpose of building credit, as there are much more cost-effective ways to do so. Keep making on-time payments to any student loans you already have and you can be rewarded in the long term.
  • Take out an auto installment loan. If youre planning on financing a car, its possible to obtain an affordable interest rate on an auto loan even without excellent credit. On-time payments on an auto loan will help you build your payment history. With an auto loan, the car itself is the security, so if you dont make your payments, it can be repossessed.
  • Participate in a nonprofit lending circle. Check out nonprofit organizations, such as the Mission Asset Fund, that have stepped up to help low-income people build their credit. They are easy to qualify for and the lenders will report your activity with them to the credit bureaus.
  • Put your rent on your reports. Some for-profit companies will send your regular rent payments to the credit bureaus. There is a fee involved, but it may be worth the cost if you really want lenders to see that youve been making regular payments to your landlord.
  • Bear in mind that credit scores calculate not just your payment history, but also your credit utilization ratio, which is the amount you owe on your credit cards relative to your total credit limit. A ratio above 30% will hurt your scores, and the lower the ratio, the better. Other credit score factors include the length of time youve used credit and the different types of credit products you carry. So mix it up and treat all the loans and credit cards you have responsibly!

    Finally, you can try Experian Boost™† . By signing up for this free service, you can have your cellphone, utility and other telecom bills listed on your credit report. Those payments will then factor into your Experian credit report and possibly lift your scores.

    Once youve obtained more attractive credit scores, your borrowing options will expand to include the many premium products that come with low interest rates and, for credit cards, valuable rewards.

    Experian Boost helps by giving you credit for the utility and mobile phone bills youre already paying. Until now, those payments did not positively impact your score.

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    Table of Contents

    Most people don’t know their credit score until a time comes when they need it.

    Don’t be one of these people!

    Good credit scores are your passport to competitive interest rates for mortgages, cars, credit card offers, insurance premiums, and more. Maintaining a high credit score is worth it because it will save you from the money you’d pay in higher interest rates.

    Luckily, it’s simple to learn your credit score. I recommend the following companies: CompanyData SourcePrice

    Learn more about each of these companies:

    2. Fix Credit Problems

    After you know your credit score, step two is: how can we improve it?

    The best way to improve your credit score is to review your credit report. The score itself is not personal, every American falls within the same range. However, the credit report, is your unique financial history.

    A credit report breaks down the following by weighted importance:

  • Payment History (30%)
    • Paying your credit card, student loan bills, etc. on time?
  • Credit Utilization (30%)
    • The ratio between credit available to you and how much of it you use
  • Credit Age (15%)
    • How long have credit lines been opened? Mortgage, credit cards, etc.
  • Account Mix (10%)
    • Variety of credit lines
  • Credit Inquiries (10%)
    • Too many hard inquiries don’t look good, i.e., applying for a bunch of credit cards at once
  • Where you get your credit report matters, which is why I strongly recommend Experian. You’re not only getting it directly from the source (Experian is one of the three credit reporting companies in America), but it’s free when you create an account!

    3. Run Up the Score

    Now it’s time to tackle the two factors in your credit report which impact your score the most.

    Did you know that missing just ONE bill can lower your credit score by 100 points? Ouch. If you’re unable to pay your bills each month, I recommend setting up a budget. This is your path to a higher credit score.

    A budget entails writing down all expenses in a given month, and all your sources of income. If the math doesn’t work, then you know what you need to do. ResourceHow It Can Help

    Credit utilization refers to how much of your total credit card limit you use. If you have a $10,000 line of credit with one card, you should never spend more than $3,000. If your limit is low, or if you can’t help but spend the whole limit, I recommend getting another credit card.

    It seems counterintuitive, but the goal is to increase your credit limit, without spending more, and this will improve your credit utilization score on your credit report.

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    A bad credit score can cost you hundreds, if not thousands, of dollars a year, according to a study by the Consumer Federation of America (CFA). The CFA found, for example, that a poor credit score would increase your interest charges on a typical auto loan by more than $5,000.

    For the average consumer without enough cash to pay for a car, home or other large purchase without the help of credit, establishing an excellent credit history is paramount.

    But getting credit without a good credit score can be tough. The good news is if you have money set aside in a savings account, you can use it to get a savings-secured loan and start rebuilding your credit.

    Secured personal loans may provide the cash you need for almost any purpose, including paying for unexpected expenses, home repairs and more.

    Secured personal loans are backed by collateral, such as a savings account, certificate of deposit or vehicle. They’re often easier to qualify for than unsecured personal loans because the lender has the right to keep your collateral if you’re unable to make your payments.

    If you use money from a savings account or CD as collateral, you probably won’t have access to it until you’ve repaid your loan. But if you secure your loan with a vehicle, you typically get to keep it throughout the term of the loan as long as you make your payments on time.

    If you’re looking for a secured personal loan, we’ve rounded up our top picks to help you find the one that’s right for you.

    Best for small loans: Regions Bank

    Why Regions Bank stands out: Some personal loan lenders have minimum loan amounts of $1,500 or more. Regions Bank offers secured personal loans as small as $250, which should help you not have to borrow more than you need. But you’ll likely need strong credit to qualify.

  • Limited availability — Regions Bank serves people in 15 states across the South and Midwestern United States: Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee and Texas. Regions Bank finalizes secured personal loans in person at a branch, so you’ll need to live in one of these states to get a loan from this lender.
  • Collateral required — You can get a secured personal loan from Regions Bank using cash from a savings account, money market account or CD as collateral. You may be able to borrow up to 100% of the account balance.
  • No prequalification — You can’t check your estimated rate and loan term before submitting a formal loan application. Applying for a secured loan with Regions Bank will generate a hard credit inquiry, which may affect your credit scores.
  • Repayment terms — Loan terms vary based on the loan amount and type of account securing the loan.
  • Read our full review of Regions Bank personal loans to learn more.

    Best credit union for secured personal loans: First Tech Federal Credit Union

    Why First Tech Federal Credit Union stands out: You’ll need to be a member to get a loan from First Tech Federal Credit Union, but joining is relatively simple. If you’re a member or decide to become one, First Tech Federal Credit Union offers competitive rates, payment protection and potential same-day approvals.

  • Low interest rates — First Tech Federal Credit Union offers very competitive rates on its secured personal loans. Rates vary based on whether you’re securing your loan with cash from a savings account, a CD or stocks you own. Loans secured with cash from a savings account or CD have lower interest rates than stock-secured loans.
  • No common fees — First Tech Federal Credit Union doesn’t charge origination, application, refinance or prepayment fees.
  • Loan payment protection — First Tech Federal Credit Union’s loan payment protection plan, which is available for an extra charge, may cancel your loan balance or payments if you’re unable to repay your loan because of death, disability or involuntary unemployment.
  • High loan amounts available — First Tech Federal Credit Union offers loans secured by cash in a savings account or CD in amounts ranging from $500 to $500,000. Stock-secured loans range from $25,000 to $1 million.