In recent years we've seen the growth of two market realities that have now come together to create one new and fast growing industry. The first is people's increased comfort with online financial transactions. With better security and growing adoption of online banking and payment, people are increasingly tending to their financial interests through the Internet.
The second is a rise in the pawn industry as people look to sell off personal items in order to do any number of things from pay off debts to maintain lifestyle, to grow new businesses where other financing avenues are not available to them. Together -- the Internet for financial transactions and the need to leverage personal assets -- have paved the way for a new model of online alternative financing that's taking off in the U.S., the UK, and now in Canada.
There are many situations where using your personal assets -- such as gold, jewellery, precious metals, diamonds or luxury watches -- as collateral for a loan can make sense to actually save you money in your daily life. Perhaps it's an unexpected expense that's come up, or the need for a bridge to tide you over between one financing option and the next. Whatever the scenario, when you possess items of value, the ability to leverage their worth is one of the growing number of alternative financing options available.
Here are five situations where pledging personal assets as collateral can save you money and headaches and allow you to avoid hidden fees:
1. Paying credit card bills late. Credit cards essentially provide a free loan up until the payment due date but then start charging interest on the entire balance for the month if you miss that due date. This means if you have a credit card with a $3,000 balance and a 19.99 per cent interest rate and you pay your bill one day past the due date, you will incur an interest fee of $50.
A loan from a personal asset lender that charges 2.9 per cent/month interest calculated on a daily basis would only cost you $2.81 for that same one day loan. Personal asset lenders only charge interest on the amount outstanding for the actual days outstanding. Also, when the minimum monthly payment (typically 3 per cent of the balance) is the same as the cost of borrowing from a personal asset lender, it could make sense to consider borrowing against personal assets in order to pay your credit card bill so that your credit rating is not negatively impacted.
2. Home insurance premiums. When insurance premiums go up, our natural inclination is to shop around to see if we can get a better deal. If you do shop around you can't hold off on paying the increased insurance premium (even if you can't afford it), because you risk having your insurance cancelled and with that comes the risk of not being able to get insurance again. It makes sense to shop around, but ensure you pay your premiums in the meantime. Using personal asset loans can be much cheaper than the ongoing premium increase you'll face if you miss a payment or delay renewing.
3. Car repairs after an accident. Making claims against your car insurance, even if you have a zero deductible, can end up costing you a significant amount of money when your insurance is renewed. Any claims that you make against a car insurance company will lead to higher premiums for an extended period of time, more than offsetting the amount of the claim. Making an insurance claim makes sense for catastrophic events (like a total demolition of your car in an accident or if your car is stolen). For other small damages, consider using your personal assets as collateral for a loan. You'll be paying interest until you pay off the loan, but the total amount of interest paid will be much lower than the long-term impact of increased premiums each year.
4. Travelling out of the country. Credit cards typically charge a foreign exchange conversion fee of 2.5 per cent plus the exchange rate (which is usually higher than the rate you see quoted in newspapers or on TV). Preparing for your trip by leveraging your personal assets before you leave can save you money. In addition to paying less in interest than the fees plus exchange rates, you also get to benefit from the personal asset lender's insurance so you can relax while on vacation knowing that your prized possessions are stored in a fully secure facility and insured for their full value. If you had planned to have these items insured while away, this would be another source of hidden savings.
5. Payday loans. If you need to bridge your finances between paycheques, consider all options before settling on payday loans, especially if you have multiple payday loans from multiple sources. Payday loans can carry annualized rates of 400-500 per cent and once you have one, it is very difficult to pay off the loan without consistently paying fees. Personal asset loans are simple and don't impact your credit, and the annualized rate is much lower (typically in the range of 34-50 per cent annually).