When A Secured Loan Makes Sense
Not too long ago, getting a loan was a truly cumbersome affair that involved physically going to the bank and bringing with you a good amount of documentation in order for your application to be processed and eventually approved. Even if the case of secured loans, while the approval process was considerably speedier, you still had to show up.
Since the World Wide Web started gaining in popularity in the mid-90’s, the financial industry has been taking advantage of the many opportunities this medium offers, notably in the area of lending. When it comes to secured loans, the process has really been streamlined. In theory, this is the “safest” type of loan a financial institution can give out: the borrower gives a collateral of equal value to the loan that he/she is applying for, and allows that collateral to be taken away if the loan is not paid off. Thus what happens is that information that pertains to your capacity to repay the loan becomes largely irrelevant.
All you actually need to provide is basic details about you, your job, and submit yourself to a security verification. The most important part of the transaction is providing the documents that state that the collateral is yours and is authentic, to make sure that the financial institution that’s granting you the loan will actually be able to take possession of that asset if you don’t pay for your loan in a timely fashion.
Some people are fervent critics of secured loans. They point out that it’s foolish to borrow money against funds that are already yours, and that you could have used interest-free, as opposed to having to pay interest on that secured loan. While the argument might look iron-clad, there are a couple of circumstances where it no longer holds up that well. Here are a few of them.
1. You’re saddled with bad credit. This is the lot of tens of millions of people. If such is the case for you, you know that bad credit lenders will be all too happy to lend you money, but only at very high interest rates because they know that your options are somewhat limited besides them. Yet, if you have savings, you can use them to break free from the ranks of people with bad credit by using them to get secured loans that you pay off on time. You get good interest rates thanks to the collateral you provide, and you rebuild your credit history while repaying the loan.
2. You have no credit. Millions of people suffer from what is called the thin credit file syndrome, which means that their credit file is either non-existent or doesn’t have enough information in it to produce a credit score. Unfortunately, in the eyes of the lending industry, no credit is almost the same as bad credit, as they have no information on which to base their decision. You can remedy that and start building a credit history with secured loans.
3. You have to face an emergency. Having to get a secured loan doesn’t always revolve around your credit situation. Everything might be fine and dandy in that department and then you have to pay for medical expenses or some similar type of emergency. If you have an emergency savings fund, getting it down to zero is probably not a good idea. Similarly, if you have a CD, cashing it out is expensive because the bank will charge you months of interest for doing so before term. Borrowing against those funds you already have might be the smarter (and financially sounder) decision, because not only will you get good interest rates, you’ll also get to keep your savings which will continue to earn interest.
The biggest drawback to secured loans is that, well, in order to take advantage of them, you have to already have the money. To a lot of people, that’s not an option. Besides that, they bring considerable benefits: easy approval, quick disbursement, and rock-bottom interest rates. And as a bonus, they can be used as a tool to improve your credit.
Erica Rivers has written extensively on the cash loan for car title industry. Get more information about this type of secured loan by reading her report on Your Finish Rich Plan, a personal finance blog she contributes to.