Secured Loans: Friend Or Foe?

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 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.

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. 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 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.

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 is an expert 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 financial education blog she contributes to.