Share secured loans: Building good credit


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Establishing good credit is important to achieving many financial goals, whether you’re buying a car, a house, or simply opening a credit card. Share secured loans are a good opportunity to rebuild your credit — even if you have poor credit history, you have a good chance to qualify for a share secured loan because this type of loan uses the balance in your savings to back up the loan, instead of your credit score.

What are share secured loans?

A share secured loan uses the assets in a share account, otherwise known as a savings account, to back up the loan. A secured line of credit uses assets, such as your house, as collateral for a loan. Both banks and credit unions offer loans backed by savings.

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.

Because they offer little risk to lenders, share secured loans typically come with low fixed interest rates, often 1% to 3% over the dividend or interest rate paid to the account by the bank. Note: The interest rate on your savings can help offset the cost of the loan.

Banks may allow you to borrow the full amount in your savings account or a percentage over a relatively short term — often 10 years or less. The maximum you’re allowed to borrow varies from bank to bank. If building credit is your goal, consider taking out a small loan, which is easier to pay off quickly.

As with any loan, avoid making late payments or defaulting on the loan. If you do, your bank may impose penalties or late fees and can seize the assets in your bank account. Late payments and defaults can also hurt your credit history.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Why use share secured loans?

There are a number of reasons to use share secured loans rather than simply using the cash in 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 they 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, including 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.
  • Share secured loans can be used 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. General rule of thumb, however, is that you should only use them to pay for something you really need.
  • Protect savings. If you have a hard time staying disciplined when building your savings, share secured loans may be right for you. The loan incentivizes you to rebuild your savings through loan payments, so at the end of the loan’s term you will have cash reserves that you can fall back on should you need them again.

As we mentioned, share secured loans are attached to collateral in the form of your savings account. While this may seem riskier than 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.

You can get an idea of how much you’ll pay each month using Bankrate’s loan calculator.

How do share secured loans work?

One of the easiest ways to build your credit is to obtain a share secured loan from your local bank or credit union. The loan is secured by your savings account, share certificate account or money market account. A share certificate account is similar to a certificate of deposit (CD), but it’s issued by a credit union instead of a bank.

When you apply for a share secured loan, your lender will grant the amount you requested and place a hold on the savings amount you want to borrow against. You can repay the loan through monthly automatic withdrawals, direct deposit, or by mailing a monthly check. If you fail to repay the loan, the savings your lender is holding as collateral will be used to cover the loan.

Although your savings 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, since share secured loans are reported to the credit bureaus.

The advantages of share secured loans

There are plenty of good reasons to get a share secured loan:

  • They can improve your credit score
  • They make it easier to apply for future loans
  • They can be used in a variety of situations
  • You can rebuild while protecting your savings
  • Interest rates are low (often 1% to 3%)

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The disadvantages of share secured loans

The savings you use as collateral are frozen until you repay the loan in full, so make sure you don’t need access to the funds. If you’re trying to rebuild credit, be sure to make your loan payments on time and avoid defaulting on the loan. Doing so could hurt your credit score, as well as future chances to borrow money.

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