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About Secured Short Term Loans

About Secured Short Term Loans

Secured short-term loans often refer to payday or title loans because they involve issuing cash using an existing personal asset such as a paycheck or the title on a car. Because of the underlying asset, individuals are able to obtain funds very quickly without the need for additional credit checks or a loan approval process. Due to their nature however they often involve higher risk and interest rates and can have significant disadvantages should the loan go unpaid.

Payday loans are one type of secured short-term loan which rely on a paycheck from the borrower before the loan is issued. However, simply providing a paycheck isn't the only requirement and often proof of employment such as numerous pay stubs or tax returns will be necessary to obtain a payday loan. It may also be necessary to provide proof of address or an active checking account against which a post dated check can be provided should the loan not be repaid according to the agreed upon terms. Payday loans often have annual percentage rates in the triple digits which can lead to significant fees and interest for such a short period of time.

Another type of secured short-term loan is referred to as a title loan. The title question is that of a vehicle which is used as collateral against the loan amount. By their very definition, title loans are risky because should a loan not be repaid the underlying asset can be repossessed by the lender and before you know it the borrower is out of a vehicle and are now unable to get to work. Sometimes title loans have the advantage of being able to result in a higher loan amount because the underlying asset may be more valuable than what a single paycheck would usually be worth. As with payday loans, title loans often have exorbitant interest rates and egregious penalties and fees should they not be repaid on time.

A commonly issued secured short-term loan is often issued by pawn shops. since secured loans by definition have underlying assets many individuals will go to a local pawn shop with jewelry or other valuables to use as collateral for receiving cash. The reason pawn shops or a viable option for most individuals is because unlike selling an asset outright, often the borrower only wants the loan for a fixed short period of time and after the loan is repaid they want their asset back. Unfortunately, if the loan is not repaid at a specified time at some point in the future then as designated by state law the pawn shop can sell the underlying asset and there's nothing the borrower would be able to do about it.

The secured nature of short-term loans is what makes them so dangerous. While it's nice to use an existing asset to get cash within minutes of showing up it also means that if the loan isn't repaid then the asset can be taken and sold with no legal recourse. Less than reputable lenders may also simply steal the underlying asset especially in the case of pawnbrokers due to the fact that it may be more worthwhile to sell it to a future customer then receive the interest and fees on a loan. As a precaution, thoroughly document the entire transaction including receipts, signed legal agreements and any and all serial numbers and photographic evidence before turning over an asset. This will help protect you by providing evidence should you need to go to court to prove your case.

Secured short-term loans by their very nature are incredibly dangerous because if the loan is not repaid then the borrower will forfeit the underlying asset. If you take out a title loan on your vehicle and it is the same car used to get to work or for driving the kids to school then losing that vehicle can put you in significant financial hardship. Even if the vehicle is taken by the lender as repayment for the loan it still may not pay the loan in full due to additional fees and interest which could mean not only did you lose your vehicle but you still owe the lender money. The lender also has the opportunity to report the outstanding debt to the three major credit reporting agencies which could negatively impact obtaining future loans and employment. It is highly recommended to avoid secured short-term loans completely if possible and only use them as a last resort should the need arise.

Image by: Jeremy Brooks