If you’ve never taken out a loan before or need to repair your credit, then a share secured loan might be a viable option. 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.
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. This also means that if you fail to repay your loan, the bank or the credit union will repossess the money sitting in your account to recoup their losses.
Secured loans, in general, make the 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 have to have a savings account or any other interest-bearing account like a certificate of deposit or a money market account. Since this account of yours will serve as collateral, you have to agree that you are pledging the money in the account to the bank the whole time you’re repaying 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 would typically add 1% to 3% to your account’s annual percentage yield or APY when it comes to 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 will earn.
Is a share secured loan right for you?
Taking out a share secured loan is an excellent way to build or repair your credit standing.
- 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 types of 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 maybe loan types other than share secured loans are your better options.
- You know you will struggle to pay back the loan. Remember that if you cannot pay back the loan at the end of the term, the bank is entitled to repossess the money in your account. If you are not sure if you can repay the loan, better not to risk it.
- You qualify for other types of loans and credit cards. While share secured loans help build credit, it is not the quickest way. 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, then perhaps you are better off not paying interest on the money you already have.
How do you get started?
If you think that a share secured loan is the perfect option for you considering your situation and the money you have in your savings account, you can get started by finding a lender that can cater to your needs and answer any questions you have. Compare rates and terms. Once you’ve applied and gotten your loan approved, set up automatic payments to ensure you don’t miss any payments and derail your efforts in building your credit score.
Building your credit score takes time. A share secured loan is just 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. So talk to us now and start building your credit today.