Many people are often unable to get an unsecured loan due to their credit history. Unlike with the secured option, an unsecured loan carries far more of a risk to the lender and a decision is only made on the lender’s calculated risk assessment that the applicant will be able to repay the loan. The lender will usually do this by asking one or more of the credit reference agencies to run a check on the applicant’s previous borrowing history to determine whether or not they pose a risk to the lender in terms of their ability to repay.
The credit reference agencies have full details of all of our current and previous borrowing records. Therefore, payment arrears, CCJs, default notices etc will all contribute to your financial ‘profile’ and an unsecured loan application can be turned down on the grounds of any of the above. In fact, even one or two late payments on a mobile phone contract bill can be sufficient grounds to refuse an application for an unsecured loan.
Secured loans are great for people with bad credit as they are more readily available. Usually, a secured loan will be made available to a homeowner, although, depending on the size of the loan required, another alternative ‘asset’ such as an expensive car or, perhaps, a caravan or boat can sometimes be used as collateral.
Secured loans are much easier to obtain as the lender is not looking to assess the applicant’s ability to repay the loan. They simply have an ‘asset’ to safeguard against the failure to repay which is usually in the form of the equity of a person’s property. This is their guarantee of repayment. In other words, if the borrower fails to repay the loan, the lender can force the sale of the home (the asset) in order to recoup their money.
Therefore, people who have CCJs, arrears and defaults, for example, will not be excluded from obtaining a bad credit secured loan as the lender is only interested in what the applicant is putting up in terms of collateral against the loan and the lender has no interest in the borrower’s credit history as they know they can always recover the loan anyway.
Secured loans are a great option for homeowners as, due to them having a much lower element of risk attached, their APR will usually always be lower than that of an unsecured loan. They are also a far better option for those who want to borrow a larger amount of money and repay it over a much longer period.
The key thing to always remember, however, is that any failure to keep up with the repayments on a secured loan can result in the lender forcing the sale of the asset to recoup their losses. This, ultimately, can mean that they have a legitimate right to force you to sell your home if you are unable to keep up with the repayments.