savings

Passbook loans: Paying to borrow your own money

You won't find splashy ads for them in your newspaper, but if you're looking for a low-cost loan, ask your bank or credit union if it offers passbook loans. Just as the name implies, it's a loan using your savings account as collateral.

Terms and conditions vary widely. You'll continue earning interest on the portion of savings that's being borrowed, and as you repay the loan you'll have access to those funds. Some banks lend 50 percent of the account balance; others let you borrow up to 100 percent. A common interest rate seems to be 3 percent above the interest rate being paid on the savings.

"Typically they're earning 1 percent on the deposit account. So, we're loaning out at 4 percent and making 3 percent with no loss experience," says Connie Cesario, vice president at Citizens-Union Savings Bank in Fall River, Mass.

At Workers Federal Credit Union in Stafford Springs, Conn., there's a tiered rate tied to the percentage of the loan that's secured by savings.

"If they use savings to back the whole loan, the rate is 3 percent," says Betty Maurer, president and CEO. "If they secure just part of the loan with their shares they pay a higher rate. If they secure 25 percent, they'd pay 7-percent interest."

Why would anyone pay to borrow his or her own money? Why not just use the money in the savings account? Some lenders say one reason is to establish credit. But Steve Rhode, a debt expert who co-founded Myvesta, a nonprofit organization that educates consumers about debt, says people shouldn't rely on passbook loans for that purpose.

"A passbook loan won't build your credit. Ninety-five percent won't be reported to the credit bureaus. You can request it, but it probably won't. The banks really don't have a mechanism to report that. Most banks aren't set up to report incidental or small loans."

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Cesario says his bank is one of the few that report passbook loans to the credit bureaus. Nevertheless, he agrees that it's important to ask the bank and don't simply assume the loan will be reported.

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