Getting approved for loans and credit cards often comes down to one key factor – your credit score. While a high score opens doors to affordable financing, a low score slams them shut. If you’re looking to improve your credit, using a secured loan strategically could provide a nice boost. But how much can it really help? Let’s run through the details.
Secured Loans – Your Credit Building Tool
Before we dive into score improvements, a quick primer on secured loans can help. These installment loans work a bit differently than regular unsecured loans.
With a secured loan, you put up an asset you own, like a car or savings account, as collateral. This gives the lender security that they can seize your asset if you fail to repay the loan. The collateral requirement makes it easier for people with lower credit scores to get approved.
Now, you’re probably wondering how does this help my score? There are a few key ways:
- On-time payments – This consistently has the largest impact on your score. Secured loans allow people with lower scores to show they can handle debt responsibly.
- Credit mix – Lenders like to see you’ve managed different types of credit, including installment loans. This can give your score a nudge upwards.
- Credit utilization – Keeping balances low on secured loans helps avoid maxing out your available credit.
| Credit Score Range | Likelihood of Score Increase |
|---|---|
| Poor (below 580) | 50-100+ points possible |
| Fair (580-669) | 10-30 points |
| Good (670-739) | Small single digit increases |
| Very Good (740-799) | Minimal increases likely |
So secured loans open the door for major credit score changes depending on your starting point. But it’s critical that you make consistent on-time payments. A missed payment can torpedo your score fast!
Setting a Solid Foundation
Improving your credit takes time and a strategic approach. Before applying for a secured loan, lay the groundwork with these tips:
- Check your credit reports and dispute any errors. Mistakes can unfairly tank your score. Monitor reports regularly after getting a loan too.
- Pay down balances on credit cards and other debts. This helps lower your credit utilization.
- Avoid new credit applications in the months preceding your secured loan application. Too many can ding your score temporarily.
- Shop around for the best secured loan rates and terms. Compare options from banks, credit unions and online lenders.
- Only borrow what you can realistically afford to repay on time each month. Defaulting on a secured loan has major risks.
Secured loans aren’t quick-fix magic wands. But used prudently, they can help rebuild damaged credit step-by-step over years, not weeks. Patience and diligence are vital.
Charting Your Course to Credit Recovery
Mary provides a great example of how secured loans can positively influence scores over time. Her credit tanked after an injury left her unable to work and falling behind on bills. Two years later, Mary’s health and income recovered but her credit remained poor at 585.
After consulting with her bank, she took out a $5,000 secured loan for debt consolidation backed by $6,000 in a savings account. Here’s how Mary’s score progressed:
- 6 months – On-time payments helped her score increase to 610
- 12 months – With her loan balance now lower, her score reached 625
- 18 months – Continued payments and credit mix improvement pushed her to 640
- 24 months – Mary’s secured loan was fully repaid, boosting her score to 665
While a far cry from a perfect 850 score, the 80+ point gain vastly improved Mary’s credit prospects. Her next step is graduating to an unsecured loan or credit card.
Conclusion: Steer Your Credit in the Right Direction
Bad credit can feel like being stuck in the mud, spinning your wheels but going nowhere. Secured loans act like tow trucks, pulling you out of the muck little by little as long as you use them properly. Patience and fiscal diligence are required on your end.
Keep in mind, late or missed payments can also rapidly backslide your credit progress. And putting up collateral has serious risks if you default. But disciplined borrowers can utilize secured loans as rebuilding tools to pave the road to financial recovery. Your destination won’t appear instantly on the horizon, but follow the credit mapping laid out here and you’ll steer yourself in the right direction.
Frequently Asked Questions (FAQs) About Secured Loans
Q: Will a secured loan improve my credit score?
A: A well-managed secured loan can boost your credit if payments are made on time, showing responsible borrowing.
Q: Is it worth it to get a secured loan?
A: It’s worthwhile if you have collateral, need funds, and can afford repayments. Assess risks carefully.
Q: What are the main disadvantages of a secured loan?
A: The main disadvantages include the risk of losing collateral, higher interest rates, and potential long-term financial commitment.
Q: What happens when you take out a secured loan?
A: You receive funds in exchange for collateral; repayments are made over an agreed period with interest.
Q: What credit score is needed for a secured personal loan?
A: A credit score above 580 is generally acceptable, but higher scores secure better terms.
Q: Which is better, a secured or unsecured loan?
A: It depends on your circumstances. Secured loans offer lower rates but risk assets. Unsecured loans don’t require collateral but have higher rates.
Q: Can you get denied for a secured loan?
A: Yes, factors like credit history, income, and collateral value can lead to denial.
Q: Can I get a loan to improve my credit score?
A: Yes, repaying a loan on time can positively impact your credit score if reported to credit bureaus.
Q: Is it bad to pay off a secured loan early?
A: No, it’s not bad. It may save on interest but check for prepayment penalties.
Q: What credit score do I need for a $5,000 personal loan?
A: Typically, a credit score above 650 is favorable, but requirements vary by lenders. Higher scores improve chances and terms.
Q: What credit score do you need for a $10,000 loan?
A: Aim for a credit score above 680 for better approval odds and terms, but lenders vary in their requirements.
