If you have bad credit or no credit at all and it’s preventing you from getting a loan from your bank, then a share-secured loan might be a good option for you.
Before getting a share-secured loan, it's important to understand what it is and how it can help rebuild your credit. Certain terms and conditions apply.
What is a share-secured loan?
With a share-secured loan, you use your own money as collateral to get a loan from your financial institution. This form of secured loan is similar to a secured credit card that provides a set credit limit equal to the cash deposit you make to the credit card company.
To get a share-secured loan, you must deposit money in an interest-bearing savings account, money market account, or CD. Your financial institution uses that money to back your loan in the event you fail to make your payments.
Since a share-secured loan poses less risk to your bank or credit union, there are fewer hoops to jump through to get the loan. You might not even have to have your credit checked.
Share-secured loans are also called passbook loans, savings-secured loans, or cash-secured loans.
Terms and conditions of a share-secured loan
The terms and conditions can vary for share-secured loans depending on the lender. While some will let you borrow up to 100 percent of your collateral account, other lenders might only let you take a percentage of what’s deposited.
Your bank or credit union will also charge interest on the money you borrow from the share-secured loan. That interest rate is usually the interest your collateral account pays plus 1 percent–3 percent. For example, if you have your money in a CD that earns 0.50 percent, then the interest on your share-secured loan will be between 1.50 percent and 3.50 percent.
Most share-secured loans have a repayment timeline between 5 and 15 years.
What are the benefits of getting a shared-secure loan?
You might be thinking, if I have money to put in a savings account, why don’t I just do that instead of getting a loan? The short answer—to rebuild your credit.
The biggest benefit of a shared-secured loan is that it can help bring up your credit score and rebuild your credit. Having bad credit can impact many aspects of your life. You will have to pay more in car insurance, have a harder time finding a rental property, and might not get a cell phone contract.
With bad credit, you’re also subject to higher interest rates, which makes it difficult to pay off existing debt because most of your payments go towards interest and not the balance on your account.
Although it might sound silly to have to put up your own money for a loan, doing so can help you save money in the long run when you rebuild your credit.
Disadvantages to share-secured loans
Once you’ve deposited money into a collateral account and you take out the share secured loan, your bank or credit union freezes that account, so you won’t be able to access that money until you repay the loan. If you default on the loan, the bank will take whatever you have in that account to pay off your loan.
This could be a disadvantage if that money is the only savings you have and if you aren’t good at making your payments on time.