What is a share-secured loan, and how does it work?
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A share-secured loan is a personal loan that is secured using the balance in your savings as collateral. This type of loan generally has lower interest rates than other personal loans because it is secured.
Share-secured loans are a good option for those with poor or no credit scores. These loans can be a great way to build your credit score because they are easier to qualify for than other loans and they typically have low interest rates.
What are share-secured loans?
Also referred to as a “passbook loan” or “certified pledge loan, a share-secured loan uses the assets in a share account, otherwise known as a savings account, to back up the loan.
When you take out share-secured loans, the equivalent assets within your savings account are frozen and become available again as you pay off the loan. The maximum you’re allowed to borrow varies from bank to bank. Some lenders may allow you to borrow the full amount in your savings account or a percentage. The money is repaid in monthly installments that are generally spread over two to 15 years.
Because they offer little risk to lenders, share-secured loans typically come with low fixed interest rates, often 1 percent to 3 percent over the dividend or interest rate paid to the account by the bank.
Where can you get a share-secured loan?
Both banks and credit unions offer share-secured loans. When researching options, evaluate the reputation of the lender and the tools or resources it offers borrowers, along with the eligibility criteria, interest rates and fees. A few examples of lenders that offer these loans are below.
Affinity Plus Federal Credit Union
Affinity Plus Federal Credit Union lets you use the money in your savings account to get a savings secured loan. Borrowers can earn MyPlus Rewards that can be redeemed in the future in exchange for cash back, events, travel, charitable donations, merchandise or a more competitive rate. Plus, you’ll have access to other membership perks, like a car buying service to help you save on your next purchase, an extensive network of realtors when you’re ready to purchase a home, discounted tax preparation software and insurance discounts.
You can join today if you meet the membership guidelines or by making a one-time donation of $25 to the Affinity Plus Foundation.
Industrial Federal Credit Union
Industrial Federal Credit Union (IFCU) offers a share-secured loan that caters to individuals looking to build credit from scratch or improve their credit rating. A credit check isn’t required to get approved as long as you’re a credit union member and have enough money in your savings account to cover the loan. But the funds in your savings account equivalent to the amount borrowed for the loan will be frozen until the loan is fully repaid. As of March 2023, the current APR was 3.00 percent, making this loan product an affordable option.
You can apply for a shared-secured loan after becoming a member, which can be done by meeting the employer or eligibility requirements or making a $5 deposit to a savings account and paying a one-time $5 membership fee. A complete list of charity options can be found on the membership page.
Navy Federal Credit Union
The Savings Secured Loan from Navy Federal Credit Union, the world’s largest credit union, comes with an extended loan term. Even better, the funds are released and made available for use as you pay down the balance. The APR is equal to the share rate plus 2% for loans of up to 60 months and increases to the share rate plus 3% for loans with 61 to 180-month terms.
There are no origination fees, and you won’t be penalized if you decide to pay the loan off early. Membership is available to military members and their relatives. You can join Navy Federal online or by visiting a branch.
Regions Bank features a Deposit Secured Loan, an installment loan available to Regions Savings or Money Market account holders. Loan amounts range from $250 to 100 percent of the available account balance. The APR varies from 4 to 6 percent based on the amount you borrow. There are also fees associated with this loan, including a late fee of 5 percent of the unpaid balance or $100, whichever is less. As an account holder, you can take advantage of the Next Step Financial Education platform, which offers resources to help you meet your financial goals.
To learn more about a Savings Secured Loan or open an account, use the online tool to request an appointment with a Regions banker.
How do share-secured loans work?
A share-secured loan is secured by your savings account, share certificate account or money market account. When you’re approved for a share-secured loan, your lender will place a hold on the savings amount you’re borrowing against.
You can repay the loan through monthly automatic withdrawals, direct deposit or monthly check. If you fail to repay the loan, the savings your lender is holding as collateral will typically be used to cover the loan.
Although your savings are used to back up the loan, you should avoid making late payments or defaulting. This may cost you penalties or late fees and can hurt your credit history because share-secured loans are often reported to the credit bureaus.
If building credit is your goal when seeking a share-secured loan, consider taking out a small amount that is easier to pay off quickly.
Pros and cons of share-secured loans
As with every type of borrowing, there are pros and cons to share-secured loans. Here are some of the benefits and drawbacks to keep in mind if you’re considering a share-secured loan.
- Build or repair your credit: These loans can help you establish a track-record of making on-time payments. Just be sure payments are reported to credit bureaus.
- Continue to earn interest and dividends: Many lenders promise that the funds in the savings or money market account that you’re borrowing against continues to earn interest or dividends.
- Easy to obtain: Because you’re borrowing against your own funds, there is typically no credit check required.
- Inexpensive: The interest rates associated with share-secured loans are typically quite low, making them an inexpensive way to borrow.
- Frozen savings account funds: While you’re repaying the loan, the money in your savings or money market account equivalent to the loan amount is typically frozen. Though some lenders release some of your savings as you repay the loan rather than waiting until the debt is repaid in full.
- Loss of collateral: If you are unable to repay the loan for some reason, you may lose the money in the savings or money market account that was used as collateral.
- Credit score impact: If you fail to repay the loan, it may trigger a derogatory mark on your credit profile.
Who are share-secured loans best for?
Share-secured loans could be a good idea for people in a few different situations.
- People who need to establish credit: If the loan is reported to the credit bureaus, making monthly payments on time can help build your credit profile.
- Those with a poor credit history: For consumers with less-than-stellar credit, this type of loan can be easier to qualify for than a traditional personal loan. “The lending institution knows the borrower has the collateral in their savings account. So, the bank is taking very little risk,” says Daniel Milan, managing partner of Cornerstone Financial Services.
However, share-secured loans may not be a good idea for everyone. You may want to look into other loan options if you fall into one of the following groups of people:
- Those who will struggle to pay back the loan: With a share-secured loan, you will have to pay it back at the end of the term. If you can’t pay it back, the bank will take the money you have in savings and you will also owe interest. Not sure if you will be able to pay back the loan? Don’t risk having to pay interest plus the total borrowed.
- People who can qualify for other types of loans and credit cards to build credit: A share-secured loan is a good way to start building credit if you have limited options, but it is not the quickest or best way to boost your credit score. If you can qualify for other types of loans or a credit card, these may be better ways to improve your credit quicker.
- Those who don’t need to improve or build credit: With a share-secured loan, you are essentially paying interest on the money you already have. If you don’t need to build your credit, you may be better off simply using the money you have in savings instead of taking out a loan using your savings as collateral.
Why use share-secured loans?
There are a number of reasons to use share-secured loans instead of taking out cash from your savings account:
- Build credit. If you have bad credit or no credit at all, these loans can help you build credit. Every time you make loan payments or pay off a loan, it will be reported to the credit reporting agencies, and your credit score should receive a boost. Ask your lender to report loan payments to the credit bureaus, and verify that it did so by checking your credit report. Each year, you can ask for a free credit report from each of the major credit reporting bureaus: TransUnion, Equifax and Experian.
- Save on future loans. While share-secured loans may cost you some money in interest payments now, a higher credit score should allow you to save money through lower interest rates on loans in the future.
- Use for any purpose. Unlike specific kinds of loans — like auto loans tied to cars — you can use share-secured loans for a variety of things. The general rule of thumb is that you should only use them to pay for something you really need and can’t afford upfront.
While using your savings account as collateral may seem riskier than taking out an unsecured loan, share-secured loans offer real opportunities to rebuild credit and improve your financial future. If you opt for an unsecured loan instead, compare rates online before applying.
Using a loan calculator, you can get an idea of how much you’ll pay each month.
What should you consider before taking out this kind of loan?
If you’re considering a share-secured loan, keep in mind that some potential risks are associated with this type of borrowing.
For instance, the savings you use as collateral will be frozen until you repay the loan in full, so you won’t have access to the funds. Milan says that if you default on the loan, your savings account will likely be used by the bank to pay off the installment loan balance. “This could wipe out your household’s rainy-day fund.”
As with any type of loan or credit application, be sure to read the fine print and review all of the terms of the agreement before signing on. Make sure you understand the true cost of the loan, including any up-front costs or annual fees, to ensure that you can make loan payments on time and avoid defaulting.
“Make sure the payment fits within your budget,” says Katie Bossler of GreenPath Financial Wellness. “The number one factor of a credit score is paying bills on time, so if the purpose of the loan is to build credit, it’s important for the consumer to make sure that the monthly payment will fit into the budget and can be paid on time each month.”
How do you qualify for a share-secured loan?
Because you’re essentially borrowing from yourself, qualifying for a share-secured loan is typically a simple process. The most important factor is the amount of savings you have in your account. Many lenders offer instant approval for this type of loan, so you can have loan funds available the same day you apply.
Here’s how to get started:
- Research different lenders. See which lenders offer share-secured loans. Depending on your collateral type, you may want to seek out different lenders. Certain banks may only offer this type of loan secured by savings, but others could allow you to use a certificate of deposit (CD) as collateral.
- Consider all the factors. Different lenders may have different terms and conditions. Some may offer you a lower interest rate. Many lenders allow you to borrow up to 100 percent of your savings or CD balance, while others allow you to borrow a percentage of what you have deposited. The repayment timeline for a share-secured loan also varies by lender and amount borrowed, but it is generally from five to 15 years. Decide what you need and research who will give you the best terms.
- Apply in person or online. Many lenders have an option to apply for a loan online. Some lenders may require you to make an appointment and apply in person. When you decide on a lender, fill out the application with the personal information required.
- Find out if you are approved. You may get approved instantly or you may have to wait to hear back. Once you are approved, you can start using the money you’ve borrowed.
What are some alternatives to share-secured loans?
If you’re looking to meet short-term financial goals or improve your credit score, there are other options available besides share-secured loans.
Similar to a share-secured loan, a secured credit card is attached to a deposit account. The credit limit is the same amount deposited into the account. The money is removed from the account if you don’t make the agreed payments.
A credit-builder loan also works like a share-secured loan, but you pay off the loan before you can access the money. The lender you choose will deposit the funds into a savings account. When the loan is paid off, you’ll have access to the money. This makes the credit-builder loan better suited for long-term needs.
Another option is a secured personal loan. A secured personal loan is backed by an asset you already own, such as a car, boat or RV. If you default on the personal loan, the lender can seize your property to recoup its losses.
A share-secured loan can be a good option to consider if you’re seeking to establish or rebuild credit. Although there’s a cost to taking out this kind of loan, it may make sense if your goal is to eventually obtain other kinds of credit that are more difficult to qualify for, such as a mortgage.
Just be sure when using this kind of loan that you understand all of the terms and conditions and check with your lender to confirm that the loan will be reported to credit bureaus.