Experts believe that a share secured loan, aka savings secured loan, is an ideal choice for short-term borrowing. Interestingly, this loan type uses your own money in a savings account as collateral. That’s why it’s one of the most convenient ways of borrowing money. Most importantly, a share secured loan helps with establishing a good credit score – if it’s repaid on time. Let’s see how the loan type actually works. All the findings, reference points, and research for this article have been taken from a reliable source such as Bankrate.

What is a share secured loan?

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A share secured loan is a type of personal loan that’s secured against the savings in your bank account or any other interest-bearing account. It could be your savings account, money market account, or certificate of deposit. So basically, it’s a personal loan that’s secured. That’s why, as compared to other personal loans, this loan type generally has lower interest rates. It also poses a lesser risk for a money lender.

Moreover, a share secured loan is a better loan option for those with a poor credit score or no credit history at all. If you’re looking to improve your credit score, this loan is a good choice as it’s easier to qualify for.

What do you need to know about a share secured loan?

The maximum loan amount you can apply for depends on banks. Some loan lenders may allow you to borrow a percentage of your savings account while others may be fine with lending you the full amount. Like all other types of loans, here too, the borrower has to make monthly payments till all the money is paid back. The loan term is generally spread over two to 15 years. You can repay the loan through monthly automatic withdrawals, direct deposits, or monthly checks. 

The loan has fixed interest rates that typically are 1 percent to 3 percent over the dividend or interest rate paid to the account by the bank.

While you can use the loan for a variety of things (unlike auto loans that are tied only to cars) it’s a sensible idea to use it only for things you really need. 

How does a share secured loan work?

You can make use of your savings account, share certificate account, or money market account to secure the loan. Banks, financial institutions, and credit unions back up these “passbook loans” or “certified pledge loans” by using the assets in your share account. The catch is that, as you begin this loan, the equivalent asset in your savings account gets frozen by the lender. It becomes available only when you repay the loan in full. 

If you fail to pay back the loan, your savings or the collateral will be used by the lender to cover the loan.

What should you keep in mind when applying for a share secured loan?

Even though you’re using your own money to get the loan, you should avoid defaulting on the loan or making late monthly payments. It will not just cost you high penalties or late fees but also hurt your credit history. Keep in mind that a share secured loan is reported to the credit bureaus. It’s a good idea to only take out an amount that you can pay back easily and quickly.

A drawback of a share-secured loan is that it freezes your savings. You’ll not have access to your funds till the time the loan is paid back in full. You may even lose all the savings in case of a default. This could be a serious risk for most householders. 

As with all financial transactions, it’s important to read the fine print, the terms and conditions, annual fees, and the upfront costs carefully before taking out the loan. 

Who benefits the most from a share secured loan?

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A share secured loan is easier to qualify for, and is a good loan option for:

  • People looking to improve their credit score and build their credit profile. 
  • Borrowers with a bad credit history. 

Who should avoid taking a share secured loan?

Such a loan may not be a good idea for those who’re struggling to pay back the loan. In case of a default, the lender will not only take your savings but also levy high interests. Also, if you don’t need to build credit, it’s better to look for alternatives. Why would you want to pay interest on money that’s already yours? You can simply use that money instead of a loan. 

If you’re qualifying for any other type of loan or have a credit card, you may consider them over a share secured loan. They might be a better and quicker way to improve your credit. A good way to compare different loan types and interest rates is by using a reliable loan calculator.

How can you qualify for a share secured loan

Qualifying for a share secured loan is a simpler process than say a home equity loan or a home equity line of credit aka HELOC. If you have a good amount of savings in your account, most lenders are willing to offer you instant loan approval. That is to say, you may even get access to the funds on the same day you apply.

How to apply for a loan?

When you apply for such a loan, there are some rules of caution that you must follow. These include:

  • Researching different lenders who offer share secured loans.
  • Understanding their terms and conditions.
  • Comparing interest rates and repayment timelines.
  • Applying for the best loan option.
  • Using the money you’ve borrowed upon being approved for a share secured loan.

What are the best alternatives to share secured loans?

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If improving your credit score is not your priority, you can explore other options such as a secured credit card that’s attached to a deposit account or a credit-builder loan where you pay off the loan before you can access the money deposited into a savings account by a lender of your choice. 

Another option is applying for a secured personal loan that’s backed by an owned asset such as a car, boat, or an RV. 

Last thoughts

A share secured loan is a good loan option if you have short-term financial goals or are seeking to rebuild your credit. This kind of loan is less difficult to qualify for than say a HELOC or a mortgage.

Just make sure you understand all of the terms and fees of the loan before signing on the dotted line.

Understanding a share secured loan and its workings was last modified: October 7th, 2022 by Ramona Sinha
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Thank God for these opportunities, so I will make the annex for mom, amen