One option that many people have for getting access to credit is seeking a secured personal loan. Unfortunately, secured personal loans are more a method for repairing your credit over time than an actual way to increase your currently available credit.

An unsecured personal loan is when you are lent a sum of money without having to have any collateral in exchange. In comparison,  a secured personal loan works like this:

You have a sum of money (in the past, objects like jewelry, gold bars, and even valuable guitars could be used. However, today these types of loans will require cash if you go through a national bank. You may explore other options with your local credit union or lender) that you wish to use as collateral for a secured loan.

You open a new savings account with the bank that is issuing the loan.

You deposit the money in the savings account.

The savings account is used as collateral for your personal loan on a dollar to dollar basis.

For example, if you have $5,000 saved up, the largest loan you could receive at most banks is $5,000. There are some banks that will loan you a certain percentage over your collateral amount, but these banks are quite rare and their policies are ever-changing.

You will have to pay interest and make monthly payments on your new secured personal loan. Additionally, you likely will not be able to access your savings account until you have paid off your personal loan in its entirety. Secured personal loan rates will vary between lenders, and depending on the amount you are borrowing and the collateral you put up, so it pays to shop around online.

So with all of this, why would anybody seek a secured personal loan?

There really is one large reason: these loans are amazing ways to repair your credit. You can have the worst credit rating in the world, and as long as you have the deposit, you have access to a very sizable loan. You are able to get a secured personal loan with bad credit, as the asset you use for collateral reduces the risk to the lender. Your bank will report this loan to the credit reporting agencies as if they gave it to you outright without a security deposit on your part. As long as you pay off your secured personal loan, this goes a very long way to showing other lenders and creditors that you are credit worthy. This is so effective, in fact, that many people who use a secured personal loan see their credit rating go up by hundreds of points over the course of the loan. Additionally, you are subject to very little liability beyond your initial security deposit.

A secured personal loan is an amazing credit repair tool. You can get started with as little as $3,000 saved up with most banks. Some banks even specialize in issuing these loans for as little as $500. One use for a personal secured loan is finance for the purchase of a valuable asset like a new car. Often the item purchased will become the security for the loan.