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.
Today, the Internet gives you the option of getting your secured loan online, with just a few clicks of your mouse. Since the loan is secured, that means that a lot of the information that you’d normally be required to provide about yourself is no longer necessary: you have a liquid asset that you give to the bank as a security, and allow them to “realize” that asset should you default on your loan.
You will be asked to fill out a few forms, where all you’ll be asked is fairly basic, general information about you and what it is that you do for a living. In the background, the lender will also run a security verification for the source of the funds you’re giving as a collateral, given money laundering concerns. Besides that, the really important information will pertain to the actual collateral. You will have to prove that it is authentic (meaning that it does exist somewhere) and is yours to do as you please (including giving it as collateral for a loan). The lender will pay great attention to this because it will be their sole basis for approval.
Since you use money that you already have when you’re getting a secured loan, many people think it’s akin to a scam from the part of financial institutions. Their point is that the money is already yours, what’s the reasoning behind getting an interest-bearing loan to get the same amount that you have in your savings? They do raise a valid point, but like many things in life, the answer is situation-specific. So when does it make sense?
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 urgent expenses. This article might make you think that getting a secured loan always stems from a credit situation but it’s not the case. There are times in life where we have to spend large amounts of money on a very short time span. If you have emergency savings or a CD, that might involve making difficult financial decisions. Taking out ALL the money in your emergency savings account is not recommended. Neither is cashing out a CD before term because you’ll lose months of interest. Your best alternative: borrow against those funds. Your emergency savings or CD will still be there, you’ll get your loan at low rates, and your money will keep earning 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.
Tags: Finance
