A secured loan is a type of loan that requires collateral, which serves as the condition for borrowing. Usually, banks and lending institutions require collateral for large loans or where the borrower’s credit score is insufficient and cannot qualify for an unsecured loan. Those who take out secured loans may enjoy lower interest rates because banks and lenders see a lower risk with them. If you default on a secured loan, the bank or lender is entitled to seize your collateral to recoup the money they lent you.
Here are some of the types of secured loans:
- – Vehicle loans
- – Car title loans
- – Pawn shop loans
- – Life insurance loans
- – Mortgage loans
- – Secured credit cards
- – Secured lines of credit
- – Bad credit loans
- – Share-secured or savings-secured Loans
In this article, we will focus on one type of secured loan: the share secured loan. This type of loan may be a viable option if you’ve never taken out a loan before or if you need to repair your credit standing. Share secured loans — also known as savings-secured loans, passbook loans, and cash-secured loans, offer minimal requirements to borrowers, making them a good choice for building their credit score.
Aside from answering the question, “what is a share secured loan?” we will also tackle what they are good for, the things you need to consider before taking one, the alternatives, and the application process.
What is a share secured loan?
A share secured loan is a type of secured loan that uses an interest-bearing account, such as a savings account, money market account, or certificate of deposit, as collateral. The amount in your account secures and backs the loan. If you fail to repay your loan, the bank or credit union will repossess the money sitting in your account to recoup their losses.
Secured loans, in general, make transactions easy for banks because the collateral guarantees that they will be able to recoup their money, whatever happens. In addition, since the collateral already mitigates the risk, secured loans usually have fewer requirements or credit checks. Some don’t even look at the borrower’s credit history and score as long as they have enough money in their bank account.
How do share secured loans work?
To start, you must have a savings account or any other interest-bearing account like a certificate of deposit or a money market account. Since this account will serve as collateral, you must agree that you are pledging the money in the account to the bank the whole time you repay the loan.
In terms of limits, you are typically allowed to loan a percentage of the total amount in your account. Take note that banks and credit unions have different rules and limitations, but you’re likely able to borrow a minimum loan amount between $200 and $500, and you can borrow as high as 80% to 100% of your balance.
Banks and credit unions typically add 1% to 3% to your account’s annual percentage yield or APY regarding interest rates. For instance, if your savings account yields 1% annually, the bank or credit union can give you 2% to 4% interest for your share secured loan. A share secured loan usually has fixed interest rates. This gives you predictable interest rates and protection if interest rates rise after you take out the loan.
When the bank approves the loan and releases the funds, you will not be able to access your savings account. Depending on the term agreed upon, you will repay the loan over five to 15 years while your money is on hold. You will regain access to it once you repay the loan.
Do your funds in the savings account continue earning interest while on hold? Yes. However, since the loan interest rate is higher than your savings account’s APY, you will pay more interest than you earn.
What are share secured loans for?
Now that we’ve answered the question “what is a share secured loan” and have shared with you how it works, it’s time to look into the reasons for using share secured loans.
- – To build credit. If you want to start building your credit for the first time, or you want a fresh start and get out of a bad credit situation, a share secured loan is a good option. Ask your lender to report your payments to all three credit bureaus. You may also check it and ask for the annual report from the major credit bureaus.
- – Save on loans in the future. When you build your credit score now, you will enjoy lower interest rates on your loans in the future, saving you more money in the long run.
- – It’s multi-purpose. Unlike specific loans, such as car loans, you can use the funds from a share secured loan for any purpose. Take note, however, that it is best to only use loans for purchases you can’t afford to pay upfront.
Is a share secured loan right for you?
Let’s get into the details and see when a share secured loan might be the best financial option for you.
- – Since a share secured loan is paid monthly, paying your installments on time can help build your credit score. After all, payment history bears much weight in calculating your credit score. It accounts for 35% of your FICO score.
- – It also improves your credit mix or the types of credit you use. 10% of your credit score is determined by how well and responsibly you use installment loans and credit accounts. If you already have a credit card, having a share secured loan in the mix — provided that you pay on time — can add points to your score.
- – You can also use a share secured loan as a stepping stone to other loans and credit. If you plan to buy a car in the future, your share secured loan payments can help build your score, helping you qualify for an auto loan easier.
If any of the following is true about you, then loan types other than share secured loans are your better options.
- – You know you will struggle to pay back the loan. Remember that the bank is entitled to repossess the money in your account if you cannot repay the loan at the end of the term. If you are still determining if you can repay the loan, it is better to avoid risking it.
- – You qualify for other types of loans and credit cards. While share secured loans help build credit, there are quick ways. If you meet the qualifications for different loans and credit cards, these may be better options for building your credit score.
- – Your credit score is okay. If you have excellent credit standing, you may be better off not paying interest on the money you already have.
What should you consider first before applying for a share secured loan?
There are potential risks involved when taking a share secured loan. Here are a few things to consider:
- – Your savings account can get frozen. Since you are using your savings account as collateral, you are relinquishing your hold of the account when you default. Banks and lending institutions can use your funds to pay for the loan balance.
- – It comes with fees. Make sure you read the fine print and know the total cost of the loan. This includes application fees, annual fees, and other upfront costs that a lender may charge.
- – You have to be able to pay every month. Carefully look into your budget and ensure you can afford the monthly payments. It will defeat the share secured loan’s purpose if you cannot pay on time and tarnish your credit score.
What are the alternatives to share secured loans?
A share secured loan is a great way to build credit. However, there are other options. If you wish to explore other options, here are some of them:
Secured Personal Loan
If your savings account is insufficient to use as collateral, but you have other items of value, such as a vehicle, an RV, or a boat, a secured personal loan may be a viable option. You can get secured personal loans from banks, lenders, and credit unions.
Credit builder loan
This is a good option for those with a limited credit history. With credit builder loans, borrowers make their payments first, then get the loan amount by the end of the payment period. Your payments are reported to at least one credit bureau (although you may want to look for a lender that reports to all three credit bureaus). Having your on-time payments reported will build your credit score.
Secured credit card
Another good way to build credit through borrowing is to avail of a secured credit card. You make a deposit to a bank or lending institution, which serves as collateral, and that amount serves as your credit limit. Making on-time payments will build your credit score and solidify your ability to manage debts.
How do you get started?
If you think a share secured loan is the perfect option for you considering your situation and the money you have in your savings account, you can quickly get started on getting a share secured loan. The process is pretty simple since you are borrowing money from yourself. Many lenders instantly approve this type of loan, too. Here’s how to go about it:
- – Shop for lenders. Research which banks and lenders offer share secured loans. Some lenders only accept savings accounts as collateral, while others allow you to use certificates of deposit (CD).
- – Compare rates and terms. Lenders vary in their terms and conditions. Some may let you borrow 100% of your savings, while others allow only a percentage. Some may offer you lower interest rates. The repayment terms and timeline also vary from lender to lender, but it’s typically between five and 15 years.
- – Submit your application. Many lenders allow borrowers to complete their applications online, while some require you to make an appointment and show up in person. Ensure that you come with copies of your documents and identification so that everything goes smoothly.
- – Get the funds and plan your payments. You may or may not get approved instantly. Once the loan is approved, take note of your payment due dates so you won’t miss any. It is best to enroll your payments to autopay to ensure on-time payments.
Where can you get a share secured loan?
Banks and credit unions offer share secured loans. Take the time to research their eligibility criteria and their terms and conditions. Here are a few lenders that offer share secured loans.
- – Industrial Federal Credit Union (IFCU). This is an affordable option as the APR as of July 2022 was 3.00%. IFCU allows individuals to build their credit from scratch through share secured loans without a credit check. The funds frozen in your account as you make payments also earn dividends.
- – Regions Bank. Savings and money market account holders may avail of the installment loan from Regions Bank called Savings Secured Loan. Borrowers can take out from $250 up to 100% of the amount they have in their accounts.
- – Navy Federal Credit Union. The world’s largest credit union caters to the military and their families. Its Savings Secured Loan comes with extended loan terms and requires no origination fees and prepayment penalties.
Building your credit score takes time. A share secured loan is one of many ways to build or repair your credit standing. Payment1 offers different loans that can help you build your credit score. From car title loans to personal loans, we have something that can help. Get in touch with us and start building your credit today.