ABC FinanceSecured loansHow Does a Secured Loan Affect Your Credit Score?

How Does a Secured Loan Affect Your Credit Score?

Read our detailed secured loan guide or enquire now for personalised advice

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in secured loans

Secured loans are a line of credit borrowed from a secured loan lender, usually for a sum larger than £25,000. You will need to provide collateral for this loan in case you cannot make your repayments. Most people use the equity in their home.

Like any financial arrangement, managing a secured loan well – keeping your account in good standing and never failing to make a repayment – can improve your credit score as it shows you are a reliable borrower. However, shouldering a substantial debt, and inviting hard searches on your credit profile, can negatively impact your credit score.

A secured loan is easier to obtain with a lower credit score, as the risk to the lender is mitigated. This risk instead lays on the shoulders of the borrower – if you cannot keep up your contractually agreed repayments, your asset will need to be sold to cover your debt. Secured loans typically have lower interest rates than their unsecured counterparts, though.

How does a secured loan affect my credit score?

Taking out a secured loan agreement with have a short-term negative impact on your credit score, though not by much. This is an unavoidable consequence of inviting a financial authority to conduct a hard search on your credit file.

Eventually, a secured loan agreement can boost your credit score – especially if you use the funds to consolidate unsecured debts into manageable monthly payments. You will reduce the number of open credit agreements against your name and utilise considerably less unsecured credit.

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Can a secured loan increase my credit score?

A secured loan can improve your credit score in two ways if used appropriately. The first is simple. The more you demonstrate that you are a reliable and trustworthy borrower, the more your credit score will improve. By making regular payments, on time and without plunging yourself into financial difficulty elsewhere, you will be showing lenders that you can take on credit arrangements and reliably keep up the repayments.

The other way that a secured loan can improve your credit score is by consolidating all your borrowing into one monthly repayment. Let’s imagine that you take out a secured loan to cover the following household debts.

  • Unsecured loan with a balance of £11,000.
  • Visa credit card with a balance of £4,500.
  • MasterCard with a balance of £5,200.
  • American Express card with a balance of £4,000.
  • A Shawbrook car loan with an outstanding balance of £7,800.

This brings a total debt of £32,500. You also have five separate credit arrangements in this case. Two to three open credit accounts are considered ideal, so your score may be negatively impacted by this number of contracts – especially if your credit card balances are over 50% of your account limit. This is known as credit utilisation. In short, the more unused credit you have available, the higher your score.

Imagine that you took out a secured loan for £34,000 (you will need a little extra to cover any early exit fees that may be levied by your car finance and unsecured loan lenders) and pay off all these accounts. You can keep one or two of your credit card accounts open, albeit with a balance of £0, closing the other(s) and removing the unsecured loan and car finance accounts from your active finances.

As well as potentially saving your money on interest repayments and offering the convenience of one set payment each month, you will eventually see an increase in your credit score. Fewer open arrangements make you appear less reliant on credit to potential lenders. Your credit utilisation score will also improve, as a secured loan does not count towards this. 

Could a secured loan decrease my credit score?

If you apply for an unsecured loan, you will see an immediate drop in your credit score. This is because your lender will conduct a hard search on your credit history. This hard search will reveal any problems you may have encountered in the last six years, so do not attempt to hide any CCJs, defaults, repossessions, or IVAs during your application. Missed or late credit repayments will also show up during a hard search.

A hard search immediately removes around 5 points from your credit score. Conducting multiple hard searches in a short time will significantly impact your credit score – each search could cost you up to 10 points. This will be a temporary arrangement; hard searches are typically wiped from a credit report after around six months.

Multiple hard searches in a short period are a red flag to many lenders. It can look like you are experiencing financial difficulty and are desperate for a line of credit to stay afloat. Think carefully before committing to a secured loan application, working with a broker to find the best deal. Chancing your arm and applying for two or three loans to see what interest rates you are offered can result in all applications being denied.

Of course, you also need to keep up with the repayments on your loan to avoid a negative impact on your credit score. Any late repayment will reduce your score, and a missed payment will be penalised with greater severity. You certainly need to avoid defaults. Not only will this remain on your credit file for six years, but you will be placing the asset you secured your loan against at risk.

Finally, consider the impact a secured loan could have on affordability assessments. As discussed, a secured loan will not count toward your credit utilisation score. However, some lenders base their decision on whether to accept an application based on incomings and outgoings from your current account.

An affordability assessment reviews several months of bank statements and observes how much money you have left over once all financial obligations are met – and, thus, whether you can comfortably afford to take on another line of credit. If secured loan repayments take up a substantial amount of your monthly income, leaving little disposable income once all accounts are settled, your affordability score will be impacted.

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Can you get a secured loan with a low credit score?

In theory, you can still get a secured loan if you have a poor credit rating. Just because you can take out a secured loan with bad credit, however, it does not necessarily mean that you should. Only seek this arrangement if you are confident that your financial problems are historical and you can take on a new line of credit without significant risk.

As you will be placing an asset up as collateral, the lender feels more secure in offering you a loan. They are secure in the knowledge that you cannot default on repayments and ride into the metaphorical sunset – if worst comes to worst, they can take you to court and force you to sell your asset and settle your debt with the proceeds.

Any application for a secured loan by a borrower with a low credit score will be based on personal circumstances. A specialist lender with experience in aiding customers with bad credit is likelier to look at the bigger picture.

If you have bad credit but plenty of equity available in your home, for example, and you can comfortably pass an affordability assessment, you are likelier to see your application accepted. Be aware that while secured loans typically have a lower interest rate than their unsecured counterparts, poor credit can still impact the interest rate you are offered.

If you have a less-than-stellar credit score, pair up with an experienced secured loan broker like ABC Finance. Get in touch if you would like to discuss your needs with our experienced team. We will be delighted to find you the best deal available for your circumstances at an extremely low broker fee of just £1,495, no matter how much you need to borrow.

Keep reading – Can You Sell Your House if You Have a Secured Loan Against It? or The Advantages and Disadvantages of Secured Loans

What other ways can I use to increase my credit score?

Before committing to a secured loan, consider if there are other ways that you could improve your credit score. Some suggestions for this are as follows.

Download and review your credit report.Ensure your credit report is up-to-date and accurate. You can sign up for a free trial with any of the ‘big three’ credit reference agencies in the UK and review your report. If anything is inaccurate, such as records of defaults or missed payments that are reducing your score, contact the lenders in question and get this rectified.
Borrow less and pay more.If you can pay more toward your existing unsecured debts, you will see a spike in your credit utilisation score as your balance drops. This also means that you’ll be able to borrow smaller sums in future, which will in turn boost your score.
Clear debts using savings.If you have a lump sum in a savings account, consider using this to clear at least some of your debts. Improve your credit utilisation score by getting active agreements below 50% of your credit limit. You’ll pay more in credit card or loan interest than you would gain in an ISA too, so this approach can also save you money over time.
Pay household bills by direct debit.If you pay your bills manually at the bank, post office, or online by debit card, consider switching to a direct debit. Regular direct debit payments from your account show an ability to manage agreements with various creditors and suppliers.
Pay expenses monthly.Consider paying expenses like car insurance, TV license, and other costs monthly by direct debit rather than as a one-off lump sum. You may pay a little more this way, but it will boost your credit score.
Register to vote.Getting yourself on the electoral roll is the fastest way to boost your credit score. It only takes a few minutes and could add as much as 50 points to your score. Ensure the address you are registered at matches those attached to your credit agreements.
Disassociate from old addresses and relationshipsSome debts can be linked to an address. Ensure you are not being penalised for financial mismanagement of somebody attached to an address you no longer reside at. Equally, ensure that your credit score is not impacted by the finances of somebody you are no longer associated with, such as a former partner.
Check eligibility before applying for borrowing.As discussed, a hard search for any credit request will impact your credit score. Consider using an eligibility checker, also known as a soft search, before applying for a line of credit. This will tell you how likely you are to be approved, usually as a percentage. There are no guarantees – you’ll still need to undertake a hard search and pass an affordability assessment – but an eligibility check reduces the risk of ‘wasting’ a hard search on a lender that is likely to decline your application.

This does not mean you should not consider a secured loan – it may be the best or only option available to you. However, taking these suggestions under advisement, and acting on them before applying for a secured loan, can ensure you get a better deal.

Could I get a secured loan if I’ve been declined for an unsecured loan?

If you have been declined access to funds via an unsecured loan, it’s advisable to wait for the associated hard search to fall off your credit report before applying for a secured loan. This may not be a dealbreaker – as discussed, secured loan lenders are less hung up on credit scores – but it may lead to a better interest rate.

Overall, anybody with sufficient equity in their assets to meet the lending conditions attached to a secured loan has a better chance of being accepted than they would for an unsecured counterpart. You can also borrow more than you would from an unsecured loan.

The core reasons why a secured loan application is likelier to be accepted than an unsecured alternative include the following:

  • Using an asset as collateral makes secured lending less risky than unsecured.
  • Secured loans do not count toward a credit utilisation score, but unsecured loans do.
  • Secured loans are often repaid over longer terms, with lower interest rates, making affordability likelier.
  • Lenders that offer secured loans base their decisions on real-time affordability rather than historical credit management.

ABC Finance is always happy to discuss your options if you want to get in touch. Just pick up the phone, arrange a call back, or drop us an email. We can work together to find the best deal for your circumstances and improve your financial standing.

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