Do Secured Loans Run Credit Checks?

By Harry Adair
Published: Nov 13, 2023

Knowledge Hub / Guide / Do Secured Loans Run Credit Checks?

Yes, a credit check will be carried out when you borrow with a secured loan. Although secured loans are a good option for individuals with low or bad credit scores due to the collateral involved, borrowers should note that a credit check is often an important part of the approval process, influencing terms and conditions of your loan.


Key Points:

  • Secured loans prioritise the value and condition of pledged assets, often outweighing the importance of your credit history
  • Secured loans are more accessible for those with bad credit scores
  • Initial secured loan applications involve soft credit checks, providing lenders with a general overview of your financial standing without negatively impacting your credit score
  • Your credit history still influences the loan’s terms, with higher scores often securing more favourable conditions


What Is a Secured Loan?

A secured loan is supported by collateral, which serves as a guarantee for the borrowed funds. Common examples of secured loans include secured car loans, mortgages and home equity loans.

For instance – with secured car loans, the vehicle itself serves as collateral, while mortgages and home equity loans use your home as collateral. Secured personal loans are also available.

It is vital to consider that if you fall behind on repayments, lenders may have the right to repossess your property to recover their cost.


Credit Checks For Secured Loans

Secured loans typically involve a soft credit check during the initial stages of the application process. A soft inquiry does not impact your credit score and is used to assess your overall financial situation. It provides the lender with an overview of your credit history without delving into specific details. A soft check does not leave a visible trace on your credit report.

Hard credit checks, on the other hand, occur later in the process, usually when you have been conditionally approved for the loan. This type of inquiry does have a temporary impact on your credit score, but it is necessary for the lender to finalise the loan terms and interest rates.

While initially impacting your credit score, secured loans possess the ability to contribute positively over time. This is particularly true if they are used to for debt consolidation, reducing the number of open credit agreements, which has the potential to enhance your overall credit standing.


Lenders Focus on Collateral

One of the key distinctions with secured loans is the emphasis on the value of the collateral, be that your car, home or other asset. While credit checks are conducted, lenders often prioritise the assessment of the asset being pledged. The value and condition of this asset play a crucial role in the approval process.

Therefore, even with a less-than-ideal credit history, if you have a substantial amount of equity in your home for example it can increase the likelihood of your application being approved.


Will My Credit Score Impact The Terms Of My Loan?

Yes, although secured loans are more forgiving when it comes to credit scores, your credit history may still influence the terms of the loan.

Although secured loans generally offer lower interest rates compared to unsecured options, a low credit score may still influence the specific interest rate you are offered. Individuals with higher credit scores may secure more favourable interest rates and loan terms.

As each lender have different approval criteria, if is still worth applying even if you have bad credit – you may find that some lenders are more willing to consider your circumstances than others.


How Can I Improve My Credit Score?

  • Join the Electoral Register: Confirm your name and address with local authorities by registering to vote. This adds credibility to your credit profile, portraying stability and a long-term presence at your current residence.
  • Close Unused Credit Cards: Eliminate unnecessary financial risk by closing down any credit cards or store cards that are not actively in use. This prevents the perception of additional available credit, which could be deemed risky by lenders.
  • Review Joint Accounts and Mortgages: If you share joint accounts or mortgages with someone with a less-than-ideal credit history, consider removing yourself. Association with individuals with poor credit can negatively impact your credit score.

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