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. 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 file. There have been a number a initiatives lately to help out people who have thin credit files. A thin credit file is a credit file that's either empty or has very little information. Thus there's nothing for the credit bureaus to base on and calculate a credit score. Although having no credit doesn't mean you don't pay off your debts, from a risk management standpoint, potential lenders eye you the same way they do people with bad credit, because they have no idea what kind of a borrower you are. Getting a secured loan can go a long way towards starting to build said 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.
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. - 15224
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 file. There have been a number a initiatives lately to help out people who have thin credit files. A thin credit file is a credit file that's either empty or has very little information. Thus there's nothing for the credit bureaus to base on and calculate a credit score. Although having no credit doesn't mean you don't pay off your debts, from a risk management standpoint, potential lenders eye you the same way they do people with bad credit, because they have no idea what kind of a borrower you are. Getting a secured loan can go a long way towards starting to build said 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.
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. - 15224
About the Author:
Jeremy Beckwith is an expert on the certificate of deposit secured loan. Get great financial tips by visiting his financial blog.
