How does a secured loan affect your credit score?

A secured loan is a form of borrowing that is secured against your property. If you maintain your repayments on time, every time, then you can build up your credit score. But if you can’t afford to repay it, your credit score will be affected and your property may be at risk.

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How a secured loan can help your credit score: 

  • You can build up a good payment history if you maintain your loan repayments on time, every time. This will boost your credit score in the long run.
  • Taking out a secured loan could help you to consolidate your debts. This may lead to a reduction in your revolving credit card debt, which in turn may reduce your credit utilisation ratio and boost your credit score. Instalment loans don’t count towards your credit utilisation ratio. Your credit utilisation is the amount of debt you have compared to your available credit limit.
  • Debt consolidation can also reduce your monthly payments, meaning you may find it easier to manage your money. This could mean you’re less likely to miss or be late with payments, which will then improve your credit score over time.

How a secured loan can bring your credit score down: 

  • If on the other hand, you cannot afford to maintain your loan repayments, then this can have a negative impact on your credit score. For example, missed and late payments stay on your credit file for six years.
  • A hard credit check is normally carried out on your credit report when you apply for credit. This can cause a temporary dip in your credit score. Don’t make too many applications in a short space of time because it can give lenders the impression that you are in financial difficulty.

Is a secured loan a good idea if I have bad credit? 

If you have bad credit, it may still be possible to take out a secured loan. But whether or not it’s a good idea depends on your own circumstances and affordability. 

You need to weigh up the pros and cons and make sure you can afford to repay the loan every month for the full duration of the loan. Remember to factor in extra outgoings (like emergency repairs, for example) to make sure you would still be able to afford the repayments if your circumstances changed in the future.

Some lenders and brokers specialise in finding finance for those with poor credit histories. And some lenders may feel more comfortable lending to someone who has a lot of equity in their property - despite having a bad credit history. From the lender’s point of view, this may offset some of the risk involved in lending to someone with bad credit.

This is because a secured loan is secured against your property. So if you cannot afford to repay it they could repossess your property.

Other ways to improve your credit score

To improve your chances of getting your loan application accepted, you work on improving your credit score first. You can check your credit history for free with our member-only platform, CredAbility, as well as the three main credit reference agencies, Experian, Equifax and TransUnion.

It can take time to improve your credit score, but there are several things you can do boost it, including: 

  • Get on the electoral roll - Make sure you’ve registered to vote, as this can boost your credit score and it only takes five minutes online. It shows the credit reference agencies that you have a stable address, which makes you appear like a more reliable applicant to lenders.
  • Maintain your repayments - Maintaining all of your bill repayments on time, every time shows lenders that you are a responsible borrower. Consider setting up Direct Debits or calendar reminders so you never miss a payment.
  • Use savings to pay off your debts - It might be worth using your savings to pay off any debts. You could be charged more interest on your debts than you’d gain in a savings account. But this depends on your own circumstances and whether you’d prefer to keep your money to one side in case of an emergency.
  • Don’t make too many applications at once - Each time you apply for credit, a hard credit check is carried out which leaves a footprint on your report. If you do this too often in a short space of time, it can affect your credit score. It can also make you look risky to lenders, as it can give them the impression that you are desperate for credit and are struggling financially.
  • Correct any mistakes - Having incorrect details on your credit report could have an impact on your ability to get credit, as the data won’t match up with your credit application, which could put future lenders off. Make sure you contact the lender and/or credit reference agency involved to ask them to correct any errors for you.
  • Remove old financial ties - If you’ve ever taken out joint finances with someone, this will show up on your credit report. Make sure you remove any old ties so that your score isn’t damaged by association. You can do this by requesting a ‘Notice of Disassociation’ from the credit reference agencies.
  • Use eligibility checkers before applying - This is a ‘soft search’ tool used to check how likely you’ll be accepted for credit, before you apply. It doesn’t impact your credit score, so you can use as many checkers as you like to find the best deal.
  • Borrow less - If you manage your budget well and borrow less, this will show lenders that you are a reliable borrower. And you are more likely to maintain a good credit rating.
  • Double your payments towards credit cards - This should have a positive impact on your credit score because you won’t have any missed payments and you will also reduce your credit utilisation.

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Secured loans are secured against your property.