When you’re thinking about taking out a secured loan, one big question that might be on your mind is whether it will show up on your credit report. It’s completely normal to be concerned about how this could affect your credit score and your ability to apply for credit in the future. Understanding how secured loans appear on your credit report is key to making an informed decision about whether it’s the right step for you. In this article, we will explore what secured loans are, how they show up on credit reports, and how they can impact your credit score, both positively and negatively. We will also explain the difference between hard and soft credit checks and how to manage your secured loan application process while protecting your credit.
What is a secured loan?
A secured loan is a loan where you offer an asset as collateral. This can be a valuable item like your home, car, or savings account. If you do not repay the loan, the lender has the right to take the asset to recover their money. Secured loans usually come with lower interest rates than unsecured loans because they are less risky for the lender. They are often used for large purchases, home improvements, or debt consolidation.
For example, a secured loan against your home might be called a second-charge mortgage. This means you are using the value of your home to secure the loan, which gives the lender more security. However, it also means that if you fail to repay, you risk losing the property.
How secured loans appear on credit reports
Secured loans, like any other type of loan, will appear on your credit report. When you apply for a secured loan, the lender reports the loan to a credit reference agency so it is visible to anyone who checks your credit report. This includes the loan amount, repayment history, and the lender’s name. However, unlike unsecured loans, a secured loan will also mention the collateral used to back the loan, like your house or car.
For example, if you have a home improvement loan that is secured against your house, your credit report will show this loan, and it will note that your house is the collateral. If you have successfully paid off the loan, it will show as “settled” or “paid off” on your credit report.
Impacts of a secured loan on your credit score
Secured loans can have both positive and negative impacts on your credit score. Your credit score is a reflection of how well you manage your debts, and secured loans are no different. Here’s how they can impact your credit score:
Positive effects of timely payments
If you make your payments on time and keep up with the agreed repayment schedule, a secured loan can have a positive impact on your credit score. The reason is simple: timely payments show that you are a responsible borrower. Payment history is one of the most significant factors in determining your credit score. So, by paying on time, you are improving your creditworthiness and increasing your chances of being approved for future loans.
Potential negative impacts from missed payments
On the other hand, missing payments on your secured loan can negatively affect your credit score. This is because lenders report missed payments to credit reference agencies, which can lower your score. Also, if you consistently fail to make your repayments, the lender has the right to repossess the asset you’ve pledged as collateral. For example, if your loan is secured against your house, this could mean you could lose your home.
To protect your credit score and financial stability, it is essential to stay on top of your payments. If you are struggling to keep up, it is important to contact your lender as soon as possible to discuss potential solutions.
Hard vs. soft credit checks for secured loans
When applying for a secured loan, the lender will typically conduct a credit check to assess your financial situation. There are two main types of credit checks: hard and soft credit checks. Each one affects your credit score differently.
Hard credit check
A hard credit check is the most common type when applying for a secured loan. It allows the lender to thoroughly review your credit history, which helps them determine whether or not you qualify for the loan. A hard credit check may cause a slight dip in your credit score, but this drop is usually temporary and should not affect you in the long term if you continue to make timely payments.
Soft credit check
A soft credit check is less intrusive and does not impact your credit score. Lenders often perform a soft credit check during the initial stages of loan shopping or when prequalifying you for a loan. A soft check allows the lender to gauge your creditworthiness without causing any harm to your score. However, if you proceed with a secured loan application, they will likely perform a hard credit check at a later stage.
Managing secured loan applications and your credit
Before applying for a secured loan, it’s important to understand your current financial situation and the potential impact on your credit score. Here are some tips to manage secured loan applications while protecting your credit:
- Check your credit report
Before applying for a secured loan, check your credit report to understand where you stand. You can access your credit report from major credit reference agencies such as Experian, Equifax, or TransUnion. This will help you see if there are any errors or outdated information that could affect your application. You can also take steps to improve your credit score by paying off small debts or correcting any mistakes on your report.
- Shop around for the best deal
While a secured loan might be easier to get if you have bad credit, it’s still important to compare rates and terms from different lenders. Brokers can help you find the best secured loan deal for your needs. Don’t settle for the first offer you get. Compare several options to ensure you’re getting the best interest rates and loan conditions.
- Be careful with multiple applications
When you apply for a secured loan, multiple credit checks can hurt your credit score. To avoid this, try to limit the number of applications you submit. Instead of applying to many lenders, research them thoroughly and consider working with a broker who can help streamline the process by finding the best options for you.
- Make timely payments
Once you have secured the loan, the most important thing is to make timely payments. Set up automatic payments or reminders to ensure you never miss a due date. Consistently paying on time will not only improve your credit score but also prevent you from losing your collateral.
Conclusion
Secured loans will appear on your credit report and can affect your credit score depending on how well you manage the loan. By making timely payments, you can improve your score, but missed payments could have a negative impact. It’s also important to understand the difference between hard and soft credit checks when applying for a loan.
If you are considering a secured loan, it’s important to research your options carefully and ensure you are financially prepared. Whether you’re using your home, car, or savings as collateral, a secured loan can be a valuable financial tool if managed responsibly.
For more information on secured loans, improving your credit score, or exploring ways to consolidate debt, check out our other articles or speak with one of our loan experts today.