The Unfair Bad Reputation Of Secured Loans
January 29th, 2009. Published under Finance. No Comments.
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.
You will be asked to give general information about yourself and what you do for a living. The current international climate also requires that you undergo a security verification, notably for the source of the funds. From then on, what your lender will most care about will be the information that you’ll have to provide that prove that the collateral you’re offering belongs to you and is actually exists. The last thing a bank wants to do is grant you a loan on the basis of a non-existing collateral, since it’s all they’re counting on to prevent losses if for some reason you don’t pay them off.
Secured loans have a lot of critics. After all, they say, why borrow money that is already mine and have to pay interest on top of it? While they do have a point, there’s more than one occasion where this way of thinking actually misses the big picture. Consider these three scenarios.
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. Your credit file is thin. Some options (such as PRBC) have been made available to people with thin credit files. The term thin credit file is used to designate people whose credit file is either completely empty of contains very little information. In those situations, credit bureaus are unable to assign them a credit score, and lenders are unwilling to do business with them because they have no credit history. If that’s your situation, it could be wise for you to get a secured loan and start paying it off, so that your installment payments start showing up on your credit file to start building that credit history.
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.
As you can see, secured loans do have their uses. They’re easy to get. They’re equally quick to get disbursed. They carry low interest rates. And they can help improve your financial situation. In the end, they’re a very good financial too to have at your disposal.