Bad credit is a burden that can really hamper you financial freedom. You may have the same income as someone else, but they have a better house, better car, better clothes, better electronics and can take better vacations because they have good credit. This allows them to finance the better things in life and not have to put their plans on hold until they save up the money in 6-12 months. Plus, they get good interest rates, which make it cost less for them to borrow this money.

The best loans for people with bad credit are secured loans. This is for two important reasons:

1. Secured loans are easier to get. This is because you are giving the lender collateral to hold on to, just in case you don’t pay your loan. If you do pay your loan, then you get your collateral back.

2. Secured loans allow you to improve your credit score and graduate to better loan terms. This positive credit history is essential to getting unsecured credit cards and loans from other lenders.

So just what is a secured loan?

With a secured loan you will be given money from the lender and, in exchange, you will give the lender some collateral to hold on to. This can be valuable, your home, car, or even cash that is equal to the value of the loan.

You make regular monthly payments on the loan and are even subject to interest fees and late payment penalties. Your interest rate may be higher than most, especially if the loan is specific to those with bad credit. This higher rate makes it possible for the lender to take on ‘riskier’ borrowers, like you.

During this time, the loan company will report on your performance to the three major credit bureaus—Equifax, Trans Union and Experian. Assuming you keep your end of the deal and make the minimum monthly payments on time, your credit score will rise and help you secure future loans.

Once the loan is completely paid off, you will receive your collateral back. You can then try to get an unsecured loan or a secured loan with a better rate from another company (or from the same company if you prefer, which may be better since you have a history with them.)

In the event that you default on your loan, the company will keep your collateral and report your negative performance to the credit bureaus. This would be unfortunate, especially if you took out this loan with the aim of improving your score.

All in all, if you have bad credit, a secured loan is one of the best loans for you to apply for and may be the only type of loan that you have a chance of approval with. Plus, it will keep you from having to get money from subprime lenders who will charge you even bigger fees and stiff you with high annual dues and other feed in the process.