If you’re looking to build a credit history from scratch, or improve one with derogatory information, a secured loan may be your best option. Secured loans are less risky to the issuing financial institution, which means you don't need a stellar credit history.
Secured Loan Basics
Secured loans require you to use your own resources to jump-start or rebuild your credit history. Though you’re putting up the assets, the transaction still shows up as an installment loan when it’s reported, with a regular monthly payment due. Some loans use a paid-for asset like a car for collateral, while others use cash you’ve agreed not to touch while you’re repaying the balance.
Credit Builder Loans
Credit builder loans give you the opportunity to improve your credit score by borrowing money to put into savings. With these financial products, you take out a loan and the proceeds remain with the bank in a savings account or certificate of deposit. The money can’t be touched until the loan is paid off. Once the payments on the loan are complete, the funds are yours to keep in the bank or use elsewhere.
Banks and Credit Unions
Some banks or credit unions will provide you a secured loan using your own money as collateral. Under these offerings, you first deposit money in a certificate of deposit or savings account, then ask the bank to loan you funds less than or equal to that amount. You won’t have access to the money you placed in savings to secure the loan while it is being repaid, so there’s little risk to the bank. Because the interest rate on a secured loan will be greater than what the bank offers in its savings accounts, you’ll lose money on the transaction, but the credit score impact may be worth it.
You also can help boost your credit score with secured loans using personal property as collateral. If you own your house, a home equity loan allows you to borrow against its value, with the lender then holding a lien on the property. Some lenders will accept loans using your paid-off vehicle as collateral as well by placing a lien on the title. You can try and get a loan against other valuable items, such as jewelry or art, but those offerings are less common at financial institutions that report secured loans to credit bureaus..
Check Before Borrowing
For your secured loan to improve your credit score, payments must be reported to the major credit bureaus. Most banks or credit unions report secured loans, but check with your bank or credit union before agreeing to terms. Even more critically, make every payment on time. If you miss a payment on the secured loan and the bank reports the delinquency, you’ll be further back than when you started.