The Unfair Bad Reputation Of Secured Loans
Looking at the evolution of the financial industry, it's amazing to see how much we've advanced compared to about 15-20 years ago. back then, getting a loan was quite a tedious affair. Even if you disregard the documentation requirements, you had to show up at the bank in person at every step of the process until your application was eventually approved and the money deposited into your account. Things moved quite faster if what you wanted was a secured loan, but there was no getting around going to a brick-and-mortar branch.
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. Your credit is bad. If you happen to have bad credit, you know first-hand how hard it can be to get a loan. Actually, it might not be that hard, but the interest rates that you will be charged are just sky-high. If you have a little bit of savings, secured loans can help you in two ways: you get better interest rates thanks to your collateral that makes your credit history irrelevant; and by repaying the loan on time, you get to rebuild your credit.
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.
Obviously, secured loans serve a purpose. And since they're offered by lenders, it's obvious that they fill a need. The biggest knock against them is their very nature: you have to have the money in order to benefit from their advantages. Besides that consideration, they're absolutely great to have as an option, since there's a lot you can benefit from (and improve) by tapping into them.
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. Your credit is bad. If you happen to have bad credit, you know first-hand how hard it can be to get a loan. Actually, it might not be that hard, but the interest rates that you will be charged are just sky-high. If you have a little bit of savings, secured loans can help you in two ways: you get better interest rates thanks to your collateral that makes your credit history irrelevant; and by repaying the loan on time, you get to rebuild your credit.
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.
Obviously, secured loans serve a purpose. And since they're offered by lenders, it's obvious that they fill a need. The biggest knock against them is their very nature: you have to have the money in order to benefit from their advantages. Besides that consideration, they're absolutely great to have as an option, since there's a lot you can benefit from (and improve) by tapping into them.
About the Author:
Jeremy Beckwith is an expert on the certificate of deposit secured loan. Get great financial tips by visiting his finance blog.
posted by Credit Counseling at
5:22 PM
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