Qualifying for a Savings-Secured Loan with Bad Credit

A savings-secured loan uses the savings you have placed with a bank or lender as collateral for financing. Using collateral is one way to qualify for a loan even when you have bad credit. This takes the burden of risk off of the lender because they will be able to collect your collateral if you default. By assuming more risk yourself, you will have more loan options and less expensive financing. Securing a loan against your savings allows you to capitalize on these benefits even if you do not have a huge asset base.

Set Reasonable Financing Limits

The most important factor in seeking a secured loan with bad credit is to be reasonable about the amount of financing you are looking to achieve. Depending on how much cash you have saved, you will only be able to achieve certain limits. Usually a lender sets these limits across the board. For example, your bank may say that it issued savings-secured loans at a 75% loan to value ratio. This means you can get a loan only up to 75% of your total savings. You should not always accept a loan at the highest amount it is offered, however. Accept a loan only in the amount you need or you will be paying interest on financing you did not even need in the first place.  

Provide Supplemental Application Material

Bad credit makes you a high risk borrower even if you are securing the loan. In order to qualify, it may be advantageous to provide the lender additional information about your financial situation. Common information includes income verification, letters from landlords or other lenders and character references. You may also prepare a personal statement regarding any negative activity on your credit report. This is useful when you have only a few late payments and can easily explain them away through financial emergencies.

Expect Higher Interest Rates

Once you get your loan approved, you will still be quoted a higher interest rate as a result of your bad credit. You have to accept that your financing will cost more in this situation, but a savings-secured loan can partially counteract this expense. Because your savings will still be earning dividends with the bank, this rate can be subtracted from the interest rate to get an actual estimate on the cost of financing. This is one of the reasons why a savings-secured loan is a good option for those with bad credit.

Utilize an Emergency Fund

High risk borrowers have usually gotten into trouble with debt in the past. If this describes you, then you need to be careful when seeking loans in the future. The best way to protect against loan default is to have an emergency fund ready in case of a financial hardship. Even if you keep spending low, there are circumstances outside of your control that can limit your ability to make monthly payments. Keeping an emergency fund with at least three months' salary will protect you against default if you lose your job, have medical bills or even need an expensive car part.

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