A secured loan is any loan that is backed or guaranteed by collateral. This means that if you default on the loan payments, the lender can take whatever asset is used as collateral to recover the debt.
The most common examples of secured loans are mortgages and auto loans, where the collateral is your home or your car. If you fail to make payments, the lender can repossess your car or foreclose on your house.
Using a Secured Loan to Build Credit
If you are just beginning to establish credit or are trying to rebuild your credit after past difficulties with credit, opening a secured loan can help you do that. However, you should use caution before applying for any loan where the debt is secured by an asset you already own, such as your car.
If you later become unable to make the payments on the loan, the lender may seize your car, leaving you with even bigger financial problems.
A Secured Credit Card Can Also Help Build Credit
Another option that can help you build a strong credit history is a secured credit card. Unlike a traditional card, you will need to give the credit card issuer a deposit in exchange for being able to charge against the card. The limit on the secured card is usually a percentage of the amount you put down as a deposit.
A secured credit card is easier to qualify for than a regular credit card because the deposit acts as a guarantee that the lender won't lose money if you fail to pay back what you charge on the account.
If you make all of your payments on time and demonstrate that you are able to use the card responsibly, your creditor may be willing to convert the account into a traditional credit card account after a certain period of time.
Secured Accounts Can Be a Good Credit Tool
In both cases, a secured account can be a good opportunity to demonstrate responsible credit behavior. As long as you make all payments on time and the lender reports the account to the credit reporting agencies, you can use the account to begin establishing or rebuilding your credit history.
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