Why Lenders Require a Secured Loan

Qualifying for a secured loan

Even if you have excellent credit, lenders may indeed only approve you for a secured loan. There are a number of reasons this may happen, and it’s important to understand that your inability to obtain approval for an unsecured loan is not necessarily a reflection on the strength of your credit but may be the result of many other reasons that are beyond the control of the lender.

Corporate policies

One of the most common reasons a lender may require a secured loan to be taken out even for those with excellent credit is corporate policies that prevent a lender from approving any loan without collateral. No matter how long you may have had a relationship with that lender or how many loans you have paid, corporate policy will supersede any relationship you may have with the lender. It’s important that you become aware of any policies the lender may have and be prepared to pledge collateral in order to secure your loan.

Individual lender policies

Sometimes even though there are no corporate policies to provide guidelines, a lender will have individual policies regarding approvals of every loan. Face value is one of the most important reasons a lender may insist on a secured loan even if you have excellent credit while others will simply not loan any money at all without some kind of secured interest. Even the type of secured interest will vary among lenders with some accepting only equity in real estate while others may accept clear title to a motor vehicle, boat or other titled collateral.

Credit score and history

How you pay your other credit is the most important factor lenders use to determine whether you need a secured loan. Certainly having good credit doesn’t mean that you will automatically be approved for an unsecured loan since many lenders will only grant loans that are secured. However, having good credit does mean you will be offered the best interest rate the lender has in place at that time. In addition, if you have good credit you may be able to borrow an amount that is higher that the value of the security you pledge.

Overall financial stability

The final determining factor in loan approval is that of your financial stability. This takes into account everything from how you pay your debts to how much money you earn. It is probably the factor that weighs the heaviest when it comes to a lender deciding how much of a loan they can approve for you.

This part of the process factors in everything including debt to income ratio in order for the lender to develop a clear and concise picture of the stability of your finances. Your entire financial stability is the single most important part of the loan process that will allow the lender to make his final decision on your loan application. Even if you have excellent credit you can be denied the loan if your financial stability does not support the feasibility of an additional loan payment.

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