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By Simon Volkov
Secured loans refer to financing that uses some type of asset as collateral. Common assets include real estate, business property, and automobiles. If borrowers default on their loan, the lender can repossess the property and sell it to pay off the outstanding balance.
Secured loans can be difficult to obtain when borrowers have poor credit. Bad credit loans carry a higher rate of interest and generally require a qualified co-signer. Entering into high-interest loans can place the collateral at risk for repossession. Therefore, careful consideration should be given to this finance strategy.
Prior to applying for a secured loan, borrowers should request a copy of their credit report from Experian, Trans Union, and Equifax. Creditors do not always report to all three credit bureaus, so it is important to review information provided on each report. All U.S. citizens are entitled to one free credit report from each agency on an annual basis through AnnualCreditReport.com.
Banks utilize credit reports to determine the credit-worthiness of applicants. They review FICO scores; income-to-debt ratio; payment history; number of delinquent payments; number of written-off accounts; accounts in collection; and number of hard inquiries.
Each time a person applies for credit a hard inquiry is added to credit reports. Hard inquiries can stem from application for secured or unsecured loans, utility companies, insurance providers, home rentals, and even employment.
Hard inquiries are reflected on credit reports for 2 years. Banks typically deny loan applications when four or more hard inquiries exist. In order to minimize impact to credit scores, borrowers should strive to keep credit inquiries to a maximum of two per year.
Borrowers with bad credit generally have a better chance of obtaining approval for secured loans vs. unsecured loans. Since secured loans are backed with collateral that can be sold if loan default occurs, banks are more willing to extend financing.
While banks are authorized to repossess collateral in the event of default, they prefer not to. Banks aren’t in business to sell repossessed property. They are in business to make money and repossession costs money.
If the asset is repossessed and sold for less than the loan balance, the bank can obtain a court ordered judgment or creditor lien. Liens are usually placed against real estate, while judgments are placed against individuals. Once a judgment is in place, creditors can seek restitution through wage garnishment.
Judgments and liens remain on credit reports until the debt is paid. They are also reported to credit bureaus and will reduce FICO scores. Bad credit reporting can prevent debtors from obtaining any type of financing for several years; even after debts are paid.
Individuals who have lost their home to foreclosure or filed personal bankruptcy within the previous 2 years will find it difficult to qualify for secured loans through conventional lenders. One option is to borrow funds through hard money lenders.
Hard money loans are provided through investors or investment groups. This type of financing is primarily used to buy real estate or to start or expand business entities.
Hard money lender loans are very expensive and should only be used as a last resort. Most hard money lenders require a minimum 30-percent down payment, and assess interest rates of 20-percent or more. Borrowers should make every effort to refinance mortgages through a conventional mortgage provider within 1 to 2 years.
About the Author: Private investor, Simon Volkov publishes a variety of personal finance articles including how to obtain
secured loans
with bad credit, bankruptcy and foreclosure prevention, and money management strategies via his website at
SimonVolkov.com
.
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