Alternatives to Small Secured Personal Loans
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UPDATED: Aug 3, 2012
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Small secured personal loans are simply loans that are secured by some sort of collateral. By being secured by collateral—which is anything of value—a loan can be lent out with less risk to the lender.
For example, imagine a borrower who wants to borrow $2,000. His lender is willing to loan that amount out but insists the borrower offer up collateral so that the lender’s money isn’t at such a huge risk. The borrower offers up money in his checking account by writing a post dated check for $2,000. The lender views this paycheck as acceptable collateral and originates the secured loan under the assumption that if the borrower defaults, his $2,000 check will be cashed to cover the cost of the loan.
While using collateral can be useful for some borrowers and lenders, not everybody is comfortable putting up valuable assets for a loan. Additionally, not everybody has assets of value that would match the loan they want to borrow. Fortunately for these two groups of people, there are alternatives to secured personal loans as well the option to compare their quotes before agreeing to any contract.
Some of those alternatives include:
- unsecured personal loans
- pawn loans
- equity loans
The specific needs of a borrower also can determine what kind of loan they need. For example, a borrower wanting a loan for a car should get financing specific to automobiles, such as a common car loan.
Unsecured Personal Loans
Unsecured personal loans—as their name implies—are really the opposite of small secured personal loans. Whereas small secured personal loans involve collateral that minimizes the risk of the loaning process for the lender, unsecured loans lack collateral. Instead, lenders use other methods in order to limit their risks.
Since unsecured personal loans are typically risky for lenders, the interest rates on these types of loans are high. This high interest accrues sizable profits for the lender in order to offset the money lost from those who default.
Pawn loans are similar to small secured personal loans but with a few differences. In pawning, collateral can be just about anything of value. Also, unlike small secured personal loans, collateral for a pawn loan is left at the premises of the pawnshop.
For example, a prospective borrower approaches a pawnshop with a valuable and rare baseball card. The pawnshop values the card at $400 and agrees to give the borrower a loan slightly less than that amount. The baseball card is left with the pawnshop until the agreed-upon time that the borrower is to return to repay the loan. Should the borrower fail to return to repay the loan then the pawnshop would own the baseball card and could sell it to recover their loss.
An equity loan is a loan which is secured by the equity of real estate property, most commonly in the form of houses. Home equity is far different than simply the appraised value of a home. Home equity is the difference between the value of the home—which has decreased across the board thanks to the housing collapse—versus the remaining debt on the property. Essentially, it is the amount homeowners will be left with after selling their house and repaying their mortgage.
Using home equity to land a personal loan can be tempting for borrowers, but it is very important to consider the ramifications of defaulting on a home equity loan.
By offering up home equity as collateral for a small secured personal loan, a borrower places their home at risk. If that borrower wishes to only borrow a small amount of money, then it is fairly unwise to borrow a small amount against such a highly valuable and necessary piece of collateral. The value of homes makes them far too valuable to be considered for small secured personal loans, particularly amid the unstable economic atmosphere created by the recession.
The needs of borrowers should determine what kind of loan to borrow. For example, borrowers interested in borrowing money for a car shouldn’t consider a secured personal loan since there are specific forms of financing available for such a purchase. A car loan would be excellent for this situation since the interest levels and fees would be appropriate for a car and no additional collateral would be required.
Similar arguments can be made for student loans, mortgages, business loans, and any other purchase that is common enough to warrant its own specific financing.
By selecting whatever appropriate loan is best for their situation, borrowers can make wise decisions for their financial present and future.