Can a Secured Loan Help You Build Credit?

If you were thinking about taking out a secured loan, you may be wondering whether a secured loan can you build credit? We will answer this question in much detail below.

Can a Secured Loan Help You Build Credit?

Yes, a secured loan can help you build credit so long as you make all of your payments in full and on time. Secured loans can help you build credit because your account status is reported to the three major credit reporting bureaus, so any payments you make should help your credit score. Your payment history accounts for 35% of your credit score, so making payments on any type of loan helps improve your credit score. However, missing even a single payment on your secured loan can cause significant damage to your credit score. So, make sure to make all of your payments on time for the best impact on your credit score.

Having said that, you should approach secured loans with caution because if you fail to repay your secured loan, your lender may seize the asset securing the loan. So, if you fail to repay, not only will you cause significant damage to your credit, but you will also lose the asset you placed as collateral for the loan. For example, if you used your car as collateral, if you fail to repay, you will lose your vehicle.

For these reasons, you should only take out a secured loan if you really need the money, and if you can repay the loan as originally agreed between you and your lender to avoid losing your collateral and causing damage to your credit.

What is a Secured Loan?

A secured loan is a loan where a person places collateral, such as cash, stocks, personal property, real property, or any other type of collateral in exchange for borrowing money. If the borrower fails to repay the loan on time as originally agreed, the lender has the right to take the collateral to recoup its losses. Lenders are more likely to make secured loans because they take less of a risk when doing so because if you fail to pay, they can take your collateral and sell it to recoup their money. They do not have to take you to court and sue you to recover their money.

Secured loans are great for someone who has bad credit or has not yet built his or her credit because they are easier to obtain than unsecured, regular personal loans. Unsecured regular personal loans require good credit because the lender is lending you the money based on your creditworthiness and there is nothing securing the loan, so the lender is taking a bigger risk by not requiring collateral.

Should You Take Out a Secured Loan?

You should only take out a secured personal loan if you know you can afford to make the monthly payments on the loan on time. This is so because missing even a single payment on the loan can cause significant damage to your credit. Even worse, if you default on the loan, you will lose the collateral you’ve placed to secure the loan.

So if you believe that there is a chance that you’ll fall behind on your loan payments, you should avoid taking out a secured loan to keep your property and avoid damage to your credit.

However, if you have the ability to make all of the loan payments on time, you can definitely used a secured loan to improve your credit. This is so because the status of your secured personal loan is likely to be reported to the credit bureaus. Making payments on loans will help you build your credit.

In fact, your payment history accounts for 35% of your credit score. So, having a loan account where you’ve made all your payments on time can significantly help you improve your credit score.

Having said that, secured loans are not for everyone. If you’ve defaulted on past debt obligations, you should approach them with extreme caution. This is so because if you default on a secured loan, you will lose your collateral and cause significant damage to your credit.

Options Other Than Secured Loans That Can Help You Build Credit

Here are some options other than secured loans that can help you build credit:

  1. Regular Credit Card – If you want to build credit or improve your credit, you should consider applying for a credit card that you have a reasonable chance of being approved for. Oftentimes, card issuers provide you with the minimum credit score required for approval, so choose a card that’s suitable for your credit score and apply for it. If you’re approved great, you can use your new credit card to build your credit. Making payments and keeping a low balance on your new credit card will help you build your credit very quickly. Just make sure to make all of your payments on time, missing a single payment can cause significant damage to your credit.

  2. Secured Credit Card – If you applied for a regular credit card, but were denied, you should consider applying for a secured credit card. Secured cards work the same way as do regular credit cards and they can be a great tool for building credit from scratch or rebuilding your credit. The only major difference between a secured credit card and a regular unsecured credit card is that you will have to place a security deposit with the card issuer to obtain a secured card. The security deposit determines your credit limit. For example, if you place a $500 security deposit, you will be issued a credit card with a $500 credit limit.

  3. Become an Authorized User – A third option for improving your credit without taking out a secured loan is to find someone, such as a close relative who has good credit, and asking them to add you onto their credit card as an authorized user. Adding yourself as an authorized user allows you to obtain the good credit history behind the credit card. For example, if your brother or sister adds you as an authorized user to their credit card, the entire credit history behind that credit card will appear on your credit report as if you had the account, boosting your credit score. That said, some people may be unwilling to add you as an authorized user because only the primary account holder is responsible for making payments on the account. You, as an authorized user, are not liable for making payments on the account.

  4. Take Out a Personal Loan – A fourth option to improve your credit is to take out a regular unsecured personal loan. Personal loans are a great option for someone who has good credit. If you don’t have good credit, you should consider asking a close friend or relative to cosign the loan with you. If they have good credit, your chances of being approved are very good. That said, you should know that if someone cosigns a personal loan with you, both of you are liable for repaying the money borrowed. If you miss payments or default on the personal loan, you will cause significant damage to your credit and your cosigner’s credit, so make sure to only take out a personal loan if you can afford to pay it off.

  5. Financing a Car – A fifth option that you have is to finance a vehicle. Now you shouldn’t go out and buy a new car just to build your credit, but if you do need a car, you should consider financing it instead of paying it off. Financing a vehicle involves taking out an installment loan to pay it off. The payments you make on a car loan will boost your credit so long as you make your payments on time. Missing even a single payment can cause significant damage to your credit. So, make sure to make all of your payments on time.

Secured vs Unsecured Loans – What is the difference between secured and unsecured loans?

At this point, you might be wondering what is the difference between a secured loan and an unsecured loan. The major difference between the two types of loans is that with a secured loan, you are placing a security deposit in the form of cash, personal property, or real property to secure the loan. If you default on the secured loan, your lender can take your property and sell it to recoup the money it allowed you to borrow.

With a regular unsecured personal loan, you are borrowing money based on your creditworthiness. The risk for lenders is larger with regular unsecured personal loans because if you default, the lender is left with nothing since there is no collateral that can be sold to recoup their money.

That said, sine unsecured loans are riskier for lenders, they typically come with higher interest rates. The higher interest rates are meant to compensate lenders for taking a risk by lending you money.

Nevertheless, if you default on an unsecured loan, you will not lose your property because there is nothing securing the loan. However, defaulting will cause significant damage to your credit when late payments are reported to the credit bureaus. If the debt is sold to a collection agency, a collection agency may cause additional damage by adding a collection account to your credit report.

Frequently Asked Questions (FAQs)

1. Will a secured loan build credit?

A secured loan, if used properly, can help you build credit. However, for a secured loan to help you build credit, you must make all of your monthly payments on time. Missing even a single payment on a secured loan can cause a missed payment mark to be added to your credit report. A missed payment mark can significantly reduce your credit score. So, make sure to make your payments on time and a secured loan will help you build credit.

2. Are secured loans worth it?

Secured loans can be used as an effective tool to borrow money and build credit. However, you must use them responsibly and make monthly payments on time for them to build your credit.

3. Is it bad to get a secured loan?

It’s only bad to get a secured loan if you believe that you’re going to default on repaying it. Secured loans can be an effective tool to build your credit. However, if you take out a secured loan and miss payments on the loan, you will cause significant damage to your credit. Additionally, if you default on your secured loan, you will lose your collateral (the money or property securing the loan).

4. What are the main advantages of a secured loan?

The main advantages of secured loans is that they’re easier to get than regular non-secured loans since lenders have collateral they can take if you default. Also, they can be used as a great tool to build credit. Additionally, they often come with a lower interest rate than regular loans since the lender is taking less of a risk since there is collateral involved.

5. Do secured loans hurt your credit?

Secured loans do not hurt your credit. They can hurt your credit if you miss payments on them or default on making your monthly payment.