When you have bad credit or lower credit scores, getting approved for personal loans can be challenging. Many lenders review your credit history, credit report and overall creditworthiness before making a decision. While some financial institutions may deny borrowers with missed payments or poor repayment history, others offer different types of loans — secured loans and unsecured loans — that can still provide access to money for debt consolidation, home improvements or unexpected expenses.
The key is understanding how each type of loan for bad credit works, the application process, and the pros and cons of borrowing.
What is a secured loan?
A secured loan is a personal loan that requires the borrower to pledge a valuable asset as collateral. This could be a car title, real estate, a savings account or even a certificate of deposit. If the borrower defaults, the lender can claim the asset to recover losses. Because the loan is tied to collateral, lenders often offer lower interest rates, higher loan amounts and more flexible repayment terms compared to unsecured loans.
What are some examples of secured loans for bad credit?
Secured loans are common across many financial institutions, including banks, credit unions and online lenders. Examples include:
Auto loans or car loans. The vehicle acts as collateral until the loan is fully repaid.
Secured personal loans. Backed by a savings account or certificate of deposit, these are often offered by credit unions and Member FDIC banks.
Home equity loans or a home equity line of credit (HELOC). Borrowers use the equity in their property for expenses like home improvements or debt consolidation.
Auto title loans. Short-term loans that use your car title as collateral.
Pawn shop loans. Jewelry, electronics or other items are pledged in exchange for cash. The amount isn’t always the same as the value of the object, however.
What are the pros and cons of secured loans for bad credit?
Like any type of funding, secured loans come with positives and negatives. Consider the following:
Pros of secured loans for bad credit
Easier approval process. Lenders are more likely to approve borrowers with lower credit scores when collateral is provided.
Lower interest rates. Because the risk is reduced, secured loans often cost less than higher interest unsecured loans.
Higher loan amount. Borrowers may qualify for larger borrowing limits depending on collateral value.
Better repayment terms. Longer repayment timelines and more manageable monthly payments are sometimes available.
Cons of secured loans for bad credit
Risk of losing collateral. If a repayment is missed, a borrower could lose their car, savings or real estate.
Longer application process. The approval process may involve collateral appraisals, title checks or more paperwork.
Extra costs. Some lenders charge fees for setting up secured personal loans, warranties or liens.
What is an unsecured loan?
An unsecured loan is a type of personal loan that does not require collateral. Instead, lenders rely on your credit score, credit history and creditworthiness to determine approval. Since the lender has no valuable assets to fall back on, unsecured personal loans usually come with higher interest rates and smaller borrowing limits.
What are some examples of unsecured loans for bad credit?
Common examples of unsecured loans include:
Unsecured personal loan. Fixed monthly payments with no collateral required.
Credit cards and lines of credit. While technically a form of revolving credit, lines of credit and credit cards are one of the most common ways to borrow money.
Short-term loans. Short-term loans, such as cash advances and payday loans, generally come with high interest rates and are due on your next payday.
Student loans. Federal student loans are typically unsecured, though private loans may vary.
Small business loans. Some lenders offer unsecured options for business owners, though requirements are strict.
What are the pros and cons of unsecured loans for bad credit?
You’ll always want to weigh the pros and cons of unsecured loans before applying for anything.
Pros of unsecured loans for bad credit
No collateral required. Borrowers don’t risk losing property or savings.
Fast approval process. Many online lenders approve applications within 24 hours.
Flexible use. Funds can be applied to debt consolidation, unexpected expenses or other financial goals.
Simple loan terms. Fixed loan payments and repayment terms can make budgeting easier.
Cons of unsecured loans for bad credit
Higher interest rates. Lenders charge higher rates to offset risk.
Lower borrowing limits. Compared to secured loans, loan amounts are often smaller.
Stricter approval process. With bad credit, qualifying for favorable loan terms may be difficult.
Potential for high-interest debt. Credit cards and payday loans can quickly spiral if repayment is missed.
Secured vs. unsecured loans for bad credit: Which type of loan is better?
Deciding between a secured loan and an unsecured loan depends on your financial situation and goals:
A secured personal loan may work best if you have a valuable asset, want lower interest rates, and need a higher loan amount for things like home improvements or debt consolidation.
An unsecured personal loan may be a better choice if you don’t want to risk collateral and you need fast funding, even if it means paying higher rates.
Final Thoughts
Both secured and unsecured loans have advantages and drawbacks for borrowers with bad credit. Secured loans may offer lower rates and higher amounts but carry the risk of losing assets if the borrower defaults. Unsecured loans protect your property but usually come with higher rates and tighter borrowing limits.
Before starting the application process, review your credit report, compare multiple lenders and make sure the loan terms fit your repayment ability and financial goals. The key difference comes down to whether you’re comfortable pledging collateral or if you prefer the flexibility of borrowing without it. Always consider your repayment ability, the loan terms and your long-term financial goals before you borrow money.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
