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A construction loan sounds pretty straightforward. Historically, borrowers got them when building a new home on a plot of land. In recent years, more borrowers have been using construction loans for projects like an accessory dwelling unit (ADU), a tiny house on a foundation, garage-to-apartment conversion, or basement conversion. But there are complications with this kind of loan that people should be aware of.

We’ll take a look at construction loans, their requirements, and some alternatives to consider.

What Is a Construction Loan?

Construction loans finance the building of a new home or substantial renovations to a current home. They are typically short-term loans with higher interest rates, designed to cover the costs of land, plans, permits and fees, labor, materials, and closing costs. They also cover contingency reserves if construction goes over budget.

How Do Construction Loans Work?

When you buy a house, you can finance the purchase with a mortgage. But when you build a house, getting financing is trickier because there’s no collateral to guarantee the loan. Lenders generally don’t accept undeveloped land as collateral because it cannot be easily appraised and quickly sold.

With construction loans, applicants must submit project plans and schedules along with their financial information. Once approved, they receive funding for the first phase of building only. As construction progresses, assessments are provided to the lender so that the next round of funds can be released. Meanwhile, borrowers make interest-only payments on the funds they’ve received.

When construction is finished — and the borrower now has a home to serve as collateral — the construction loan may be converted to or paid off by a regular mortgage. The borrower then begins repaying both the principal and interest.

Recommended: What Is Revolving Credit?

What Does a Construction Loan Cover?

What construction loans cover varies based on the borrower’s needs. If necessary, these loans can cover the cost of the land, building labor and materials, permits, and a contingency cushion for unforeseen expenses.

Types of Construction Loans

Construction-to-Permanent Loan

Sometimes referred to as a single-close loan, this is a construction loan that converts to a mortgage once the project is finished. The borrower saves money on closing costs by eliminating a second loan closing.

Construction-Only Loan

Also called a standalone construction loan, this loan must be paid off when the building is complete. You will need to apply for a mortgage if you don’t have the cash to do so.

Having separate construction and mortgage loans allows homeowners to shop for the best terms available when applying for each loan. However, they will pay separate closing costs on each loan.

Renovation Construction Loan

This is specifically designed to cover the cost of substantial renovations on an existing home. The loan gets folded into the mortgage once the project is complete.

What Are the Requirements for a Construction Loan?

It’s typically harder to get a construction loan than it is to secure a mortgage. Some people even hire construction loan brokers to facilitate the process. Because your house or ADU isn’t built yet, as we mentioned above, there’s no collateral. And because there’s no collateral, lenders will want to see strong evidence that the home will be completed.

A loan that doesn’t require collateral is also known as an “unsecured loan.” You can learn more about the two types of loans in our guide to secured vs. unsecured loans.

With renovations, the lender wants to see that the project will add to the value of the home. To get an idea of the ROI on your renovation project, check out SoFi’s Home Project Value Estimator.

In order to get approved, you’ll have to show your potential lender an overview of your financial profile, with plenty of documentation. They’ll typically want to see a debt-to-income ratio of 45% or lower and a high credit score.

For new construction projects, they’ll also want you to be able to make a down payment of up to 30%. And for construction-only loans, they may want to know what your repayment plan is — that is, whether you will pay in cash or refinance when the project is complete.

In addition, the lender will want a detailed plan, budget, and schedule for the construction. Some lenders will also need to approve your builder. Because the project will depend on the builder’s ability to complete the construction to specifications, your builder’s reputation may be crucial to getting a construction loan approved.

Lenders typically need to see a builder’s work history, proof of insurance, blueprints, and specifications for the project, a materials list, and your signed construction contract.

What Are the Average Interest Rates and Terms?

Typically, construction loans have variable interest rates that rise and fall with the prime lending rate. They tend to be higher than conventional mortgage rates by about 1%.

The terms also vary. A construction-only loan is usually a short-term loan that must be converted or paid off in one year.

A construction-to-permanent loan will typically have a term of 15 to 30 years once it becomes a permanent mortgage. Again, though, the interest rate will usually be higher than a conventional loan because of the increased risk. The longer the term, the higher the rate tends to be.

Are There Alternatives to Construction Loans?

A lot of time and effort may go into securing a construction loan. It can be difficult to find lenders that offer competitive rates and to qualify for them — particularly if you don’t have a flawless credit history. Plus, construction loans tend to be complicated because it is often the builder who has to carry the loan.

If you are planning a small construction project or renovation, there are a few financing alternatives that might be easier to access and give you more flexibility.

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Personal Loans for Renovations

An unsecured personal loan can fund a renovation project or supplement other construction financing.

Personal loan interest rates are typically lower than construction loan rates, depending on your financial profile. And you can frequently choose a personal loan with a fixed interest rate.

Personal loans also offer potentially better terms. Instead of being required to pay off the loan as soon as the home is finished, you can opt for a longer repayment period. And getting approved for a personal loan can be much faster and easier than for a construction loan.

The drawbacks? You won’t be able to roll your personal loan into a mortgage once your renovation or building project is finished.

And because the loan is disbursed all at once, you will have to parse out the money yourself, instead of depending on the lender to finance the build in stages.

Cash-Out Refinance for Construction Costs

A cash-out refinance is also a good financing tool, particularly if you have a lot of equity in your current home. With a cash-out refinance, you refinance your home for more than you owe and are given the difference in cash.

You can estimate your building or renovation expenses with this Home Improvement Cost Calculator. Add your estimate to what you owe on your home to get the amount of your refinance.

Using one — or both — of these alternative financing tools may help you avoid some of the hassle and expense that come with construction loans.

The Takeaway

Planning a new home, ADU, or substantial renovation? A construction loan may be the ticket, though this kind of loan is usually harder to get than a mortgage, often carries a higher interest rate, and is typically short-term. For smaller projects, a personal loan or cash-out refinance can be a good option — and a lot less complicated.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Many of us would love to own a vacation home, but the added expense is not always doable. Because we can’t all own multiple properties, vacation timeshares continue to be a popular choice for solo travelers, couples, and families who want more space, amenities, and “a place to call home” at their locale of choice.

We’ll give you an honest rundown of how timeshares work, their pros and cons, and a few financing options.

What Is a Timeshare?

A timeshare is a way for multiple unrelated purchasers to acquire a fractional share of a vacation property, which they take turns using. They share costs, which can make timeshares far cheaper than buying a vacation home of one’s own.

Timeshares are a popular way to vacation. In fact, 9.9 million U.S. households own at least one timeshare, according to the American Resort Development Association (ARDA). The average price of a weekly timeshare is $24,140. This figure can vary widely depending on the location, size, and quality of the property, the length of stay, time of year, and the rules of the contract.

How Do Timeshares Work?

If you’ve ever been lured to a sales presentation by the promise of a free hotel stay, spa treatment, or gift card, it was probably for a vacation timeshare. As long as you sit through the sales pitch, you get your freebie. Some invitees go on to make a purchase. You can also buy a timeshare on the secondary market, taking over from a previous owner.

What you’re getting is access to a property for a set amount of time per year (usually one to two weeks) in a desirable resort location. Timeshares may be located near the beach, ski resorts, or amusement parks. You can trade weeks with other owners and sometimes even try out other properties around the country — or around the world — in a trade.

In addition to the upfront cost of the timeshare, owners pay annual maintenance fees based on the size of the property — about $1,000 on average — whether or not you use your timeshare that year. These fees, which cover the cost of upkeep and cleaning, often increase over time with the cost of living. Timeshare owners may also have to pay service charges, such as fees due at booking.

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Types of Timeshares

There are two broad categories of timeshare ownership: deeded and non-deeded. In addition, you’ll find four types of timeshare use periods: fixed week, floating week, fractional ownership, and points system.

It’s important to understand all of these terms before you commit.

Deeded Timeshare

With a deeded structure, each party owns a piece of the property, which is tied to the amount of time they can spend there. The partial owner receives a deed for the property that tells them when they are allowed to use it. For example, a property that sells timeshares in one-week increments will have 52 deeds, one for each week of the year.

Non-deeded Timeshare

Non-deeded timeshares work on a leasing system, where the developer remains the owner of the property. You can lease a property for a set period during the year, or a floating period that allows you greater flexibility. Your lease expires after a predetermined period.

Fixed-Week

Timeshares offer one of a handful of options for use periods. Fixed-week means you can use the property during the same set week each year.

Floating-Week

Floating-week agreements allow you to choose when you use the property depending on availability.

Fractional Ownership

Most timeshare owners have access to the property for one or two weeks a year. Fractional timeshares are available for five weeks per year or more. In this ownership structure, there are fewer buyers involved, usually six to 12. Each party holds an equal share of the title, and the cost of maintenance and taxes are split.
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Points System

Finally, you may be able to purchase “points” that you can use in different timeshare locations at various times of the year.

Is a Timeshare a Good Investment?

Getting out of a timeshare can be difficult. Selling sometimes involves a financial loss, which means they are not necessarily a good investment. However, if you purchase a timeshare in a place that your family will want to return to for a long time — and can easily get to — you may end up spending less than you would if you were to purchase a vacation home.

Benefits of Timeshare Loans

The timeshare developer will likely offer you financing as part of their sales pitch. The main benefit of a timeshare loan is convenience. And if you’re happy to return to the same vacation spot year after year, you may save money compared to staying in hotels. Plus, for many people, it may be the only way they can afford getting a vacation home.

Drawbacks of Timeshare Loans

Developer financing offers often come with very high interest rates, especially for buyers with lower credit scores: up to 20%. And if you eventually decide to sell, you will probably lose money. That’s because timeshares tend not to gain value over time. Finally, if you’re not careful about running the numbers before you commit, you can end up paying more in annual fees than you expect.

Recommended: What Is Revolving Credit?

Financing a Timeshare

Developer financing is often proposed as the only timeshare financing option, especially if you buy while you’re on vacation. However, with a little advance planning, there are alternative options for financing timeshares. If developer financing is taken as an initial timeshare financing option, some timeshare owners may want to consider timeshare refinance in the future.

Home Equity Loan

If you have equity built up in your primary home, it may be possible for you to obtain a home equity loan from a private lender to purchase a timeshare. Home equity loans are typically used for expenses or investments that will improve the resale value of your primary residence, but they can be used for timeshare financing as well.

Home equity loans are “secured” loans, meaning they use your house as collateral. As a result, lenders will give you a lower interest rate compared to the rate on an unsecured timeshare loan offered at a developer pitch. You can learn more about the differences in our guide to secured vs. unsecured loans.

Additionally, the interest you pay on a home equity loan for a timeshare purchase may be tax-deductible as long as the timeshare meets IRS requirements, in addition to other factors. Before using a home equity loan as timeshare financing, or even to refinance timeshares, be aware of the risk you are taking on. If you fail to pay back your loan, your lender may seize your house to recoup their losses.

Personal Loan

Another option to consider for timeshare financing is obtaining a personal loan from a bank or an online lender. While interest rates for personal loans can be higher than rates for home equity loans, you’ll likely find a loan with a lower rate than those offered by the timeshare sales agent.

Additionally, with an unsecured personal loan as an option for timeshare financing, your primary residence is not at risk in the event of default.

Getting approved for a personal loan is generally a simpler process than qualifying for a home equity loan. Online lenders, in particular, offer competitive rates for personal loans and are streamlining the process as much as possible.

The Takeaway

Timeshares offer one way to secure a place to stay in your favorite vacation destination each year — without having to buy a second home. And timeshares may save you money over time compared to the cost of a high-end hotel. However, beware of timeshare financing offered by developers. Interest rates can be as high as 20%. There are other ways to finance a timeshare that can be more affordable, including home equity loans and personal loans.

SoFi personal loans offer lower fixed rates to qualified applicants. And there are no fees ever. Find out your interest rate online with no impact to your credit1 and no commitment.

FAQ

Can I rent my timeshare to someone else?

Whether or not you can rent your timeshare out to others will depend on your timeshare agreement. But in many cases your timeshare resort will allow you to rent out your allotted time at the property.

Can I sell my timeshare?

Your timeshare agreement will give you details about when and how you can sell your timeshare. In most cases, you should be able to sell, but it may be hard to do so, and you may take a financial loss.

Can I transfer ownership of my timeshare or leave it to my heirs?

You can leave ownership of a timeshare to your heirs when you die and even transfer ownership as a gift while you’re living. Once again, refer to your timeshare agreement for rules about what is possible and how to carry out a transfer.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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A qualified mortgage is a type of loan with certain more stable features that help make it more likely that a borrower will be able to repay their loan. This doesn’t necessarily involve more work for the borrower, but it does mean that lenders will take a deeper dive into a potential borrower’s finances. The lender will analyze factors such as a borrower’s ability to repay to better determine if the mortgage they applied for is considered affordable for them under the guidelines.

Created in an effort to clamp down on the excessive risk-taking in the mortgage industry prior to 2008, the rule is intended to protect consumers from harmful practices. However, it may also make it harder to qualify under certain loan programs.

How Qualified Mortgages Work

Qualified mortgages follow three basic tenets, outlined by the Consumer Financial Protection Bureau (CFPB):

1.    Borrowers should be able to pay back their loans.

2.    A qualified mortgage should be easier for the borrower to understand.

3.    The qualified mortgage should be a fair deal for the borrower.

Based on these ideas, the CFPB created stricter guidelines for loans that are not sold to Fannie Mae or Freddie Mac to ensure that borrowers could repay loans.

For these loans, there is a limit on how much of a borrower’s eligible income can go toward debt. In general, total monthly debts cannot exceed 43% of a borrower’s gross monthly income, a percentage referred to as a debt-to-income ratio (DTI). Limiting the amount of debt a borrower can take on makes them a safer bet for banks and less likely to default on their mortgage. Keeping the loan within a reasonable DTI ensures that a borrower is not borrowing more money than they can repay.

Next, the loan term on a qualified mortgage must be no longer than 30 years. Once again, this is in place to protect the home buyer. A loan term beyond 30 years is considered a riskier loan because the extended term means longer payback and additional interest — both key considerations when it comes to how to choose a mortgage term.

In addition, a qualified mortgage is barred from having some other risky features, such as:

•   Interest-only payments: Interest-only payments are payments made solely on the interest of the loan, with no money going toward paying down the principal. When a borrower is only paying interest, they don’t make a dent in paying off the loan itself.

•   Negative amortization: With amortization, the amount of the loan goes down with each regular payment, as is illustrated when using a mortgage calculator. In the case of negative amortization, however, the borrower’s monthly payments don’t even cover the full interest due on the mortgage. The unpaid interest then gets added to the outstanding mortgage total, so the amount owed actually increases over time. In some cases, depending upon market conditions, a borrower could end up owing more than the home is worth.

•   Balloon payments: These are large, one-time payoffs due at the end of the introductory period of the loan, historically after five or seven years.

Additionally, qualified mortgages have certain limits on the points and fees that lenders are allowed to charge. A lender can only charge up to the following maximum fees and points on a qualifying mortgage; otherwise, it’s referred to as a high-priced mortgage, which carries additional guidelines:

•   For a loan of $100,000 or more: 3% of the total loan amount

•   For a loan of $60,000 to $100,000: $3,000

•   For a loan of $20,000 to $60,000: 5% of the total loan amount

•   For a loan of $12,500 to $20,000: $1,000

•   For a loan of $12,500 or less: 8% of the total loan amount

Alongside caps on points and fees, there are also limits on the annual percentage rate (APR) that can be charged on a qualifying mortgage. This threshold can vary depending on the loan’s size or type.

Lastly, lenders must verify a borrower’s ability to repay the loan, so they’re not immediately scrambling to figure out how to lower mortgage payments. The ability-to-repay rule encompasses different aspects of a borrower’s financial history that a lender must review. Specifically, a lender is likely to review items such as:

•   Income

•   Assets

•   Employment

•   Credit history

•   Alimony or child support, or other monthly debt payments

•   Other monthly mortgages

•   Mortgage-related monthly expenses (such as private mortgage insurance, homeowners association fees, or taxes)

Under some circumstances, however, lenders might not have to follow the ability-to-repay rule and the mortgage can still count as a qualified loan.

In addition to the protections provided to borrowers, the rule also grants lenders some protection. Qualified mortgages offer safe harbor to the lender if ability to repay rules were properly adhered to when qualifying the borrower(s) for the requested loan program. In these instances, borrowers can’t sue based on the claim that the institution had no basis for thinking they could repay their loans. The rules also make it harder for borrowers to buy more house than they can afford.

What Is a Non-Qualified Mortgage?

A non-qualified mortgage (non-QM) is a type of mortgage loan that does not meet the standards required for a qualified mortgage, outlined above.

However, a non-QM loan is not the same as the subprime loans that were available before the housing market crash. Typically, with a non-QM loan, lenders confirm that borrowers can repay their loans based on reasonable evidence. This can include verifying much of the same information as qualified mortgage loans, such as assets, income, or credit score.

Non-qualified mortgage loans allow lenders to offer loan programs that don’t necessarily meet the strict requirements of qualified mortgages. Because non-QM loans don’t have to adhere to the same standards, it means the underwriting requirements, like the qualified mortgage DTI limit, can be more flexible.

The upside is that this can provide eligible borrowers with more loan program choices. That being said, non-qualified loans can vary by lender, so borrowers who take this route should research their options carefully and take advantage of tools like a home affordability calculator to help ensure they don’t get in over their head.

Recommended: Home Buying Guide

When Could a Non-QM Loan Be the Right Option?

While qualified mortgages have safeguards in place for both the lender and the borrower, in some circumstances, it can make sense for a borrower to choose a non-qualified mortgage.

Many lenders offer non-QM loan programs because they have more flexible loan features. In some instances, a borrower may opt for a non-QM loan because of property issues, such as a condo that doesn’t meet certain criteria or a certain property type.

This type of loan may be right for borrowers who can afford the mortgage but don’t conform to additional qualified-mortgage requirements. Examples of borrowers who might seek a non-qualified mortgage are:

•   The self-employed: Borrowers with streams of income that might be difficult to document, like freelance writers, contractors, and others, might consider a non-qualified mortgage.

•   Investors: People investing in real estate properties, including flips and rentals, might choose to apply for a non-qualified mortgage. This could be because they need funding faster or have a challenging time proving income from their rental properties.

•   Non-U.S. residents: People who are not U.S. residents may find it challenging to meet the requirements for qualified mortgages because they may have a low or nonexistent credit score in the U.S.

While understanding the nitty-gritty of qualified mortgages vs. non-qualified mortgages might feel overwhelming, understanding the differences and other mortgage basics might make choosing the best loan fit for your needs easier. It’s important to do your research and ask lenders questions about the different loan programs available.

If you’re looking for a mortgage to fit your financial needs, consider checking out SoFi’s Mortgage Loans. Borrowers can put as little as 10% down for loans up to $3 million. And with competitive rates and dedicated mortgage loan officers, applying for a new home might be easier than you think.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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There are at least 11 different types of personal loans out there — but one you may not have heard of yet is the share secured loan.

An accessible option for those who might not qualify for a traditional unsecured personal loan, a share secured loan uses the funds in your interest-bearing savings account as collateral — which means you can pay for a big expense without wiping out your entire savings.

Here are the basics about share secured loans — how they work, the benefits, allowed uses, requirements, and more.

What Is a Share Secured Loan?

A share secured loan, which may also be known as a savings-secured loan, cash-secured loan, or a passbook loan, is a type of personal loan.

However, unlike many other types of personal loans, these loans are — as their name implies — secured: The bank or other lending institution uses the money in your savings account, Certificate of Deposit (CD), or money market account as collateral to lower their risk level when offering the loan. This can make qualification less onerous for the applicant.

In addition to making it easier to qualify for a loan, share secured loans also allow you to fund an expensive purchase or cost without depleting your savings. They can also help you build credit, which is particularly important if your existing credit history or credit score could use some work.

Of course, like all other loans, share secured loans do come with costs and limitations of their own, and it’s worth thinking carefully before going into any kind of debt.

Recommended: What Is a Certificate of Deposit?

How Do Share Secured Loans Work?

In order to take out a share secured loan, you must first have money saved in an interest-bearing savings account. Money invested in the stock market cannot be used as collateral for this kind of loan, since it isn’t FDIC or NCUA insured and is at some amount of risk.

Banks that offer share-secured loans will cap the loan at some percentage of the amount of money you have in your account, between about 80% to 100% of those funds. They may also list a loan minimum of between $200 and $500.

When you apply for the loan, the money in your savings account will be put on hold and made inaccessible to you, and the loan funds will be issued to you as a check or directly deposited into your checking account.

You’ll then be responsible for paying the loan back in fixed monthly installments over a term that may last as long as 15 years, and which will include an interest rate of about 1% to 3% more than your savings account earns. For example, if you secured the loan with a money market account that earns 2% APY, your loan interest rate might be 3% to 5%.

Once the loan is paid off, you’ll regain access to the funds in your savings account, which will still have been earning interest the entire time.

Benefits of a Share Secured Loan

It may seem a bit strange to borrow money you already have, which is pretty much how a share secured loan works. But there are certain benefits to this approach if you need to pay down an expensive bill or fund a costly project up front.

Cost

Of the different types of personal loans that are available, share secured loans have some of the lowest interest rates — precisely because the bank has your money as collateral if you don’t repay the loan.

Still, even if the loan interest rate is only a few percentage points over the amount of money you earn in interest on your savings account, you’ll pay more than you would if you were able to use cash to fund your expense.

Eligibility Requirements

One of the biggest benefits to share secured loans is their relatively lenient eligibility requirements. Since they are secured, lenders consider them less risky.

If your credit score is on the low end of the range, you may not qualify for other types of personal loans, and if you do qualify, their interest rates may be high (as in the case of a payday loan or pawnshop loan). A cash-secured loan offers an accessible and relatively inexpensive alternative option.

Credit Building

Finally, one of the most important benefits of share secured loans is their power to help you build your credit — which can help you qualify for other types of loans in the future. Credit building is one of the best reasons to seriously consider a share secured loan to fund an expense you might otherwise be able to pay for in cash.

Recommended: How to Build Credit Over Time

Are Share Secured Loans a Bad Idea?

Everyone’s financial landscape is different, and only you can decide whether or not a share secured loan is right for you. That said, along with the benefits discussed above, there are some risks to using your existing funds as collateral to go into debt.

Namely, if you fail to pay back the loan, the lender can seize the funds in your savings account — and you’ll still be responsible for repaying the loan, which can have a negative effect on your credit score. Additionally, even a low-cost loan isn’t free, and depending on the loan amount and its term, you may end up spending a significant amount of cash on interest over time.

Common Uses of a Share Secured Loan

Share secured loans are used for a wide variety of reasons and share many of the common uses of a personal loan.

For example, a borrower might use a share secured loan to cover an unexpected medical bill or car repair payment. Share secured loans can also be used to cover moving expenses, home improvement costs, or even debt consolidation to pay off other forms of high-interest loans, like credit cards, which could help you get back on track financially.

Who Is a Share Secured Loan Best For?

While it’s important to consider all your options before going into any form of debt, a share secured loan might be an attractive choice for borrowers who already have a substantial amount of cash in savings but might not have the liquidity to pay for a large expense comfortably.

Additionally, if you have a poor or fair credit score, a share secured loan may help you qualify for the funding you need while also building up your credit score over time.

Qualifying for a Share Secured Loan

The good news about qualifying for a sharesecured loan is that so long as you have the money in your account saved up, this financial product is very accessible. Many share secured loans are available for borrowers with poor credit or even no credit history — though it’s always a good idea to shop around and compare rates and terms available from different lenders.

Share Secure Loans: Alternative Loan Options

While share secured loans can be a good option for certain borrowers, there are other alternatives worth considering as well:

•   A secured credit card works in a similar way to a share secured loan. You’ll only be able to use as much cash as you put on the card, and it can help you build credit.

•   If you don’t have substantial savings built up quite yet, a credit-builder loan might work for your needs, though it’s likely to come at a higher interest rate since there’s no collateral involved.

•   A guarantor loan, one on which someone cosigns with you and agrees to repay the debt if you default, may make it possible for you to qualify for better terms than you otherwise would with poor to fair credit.

Other Types of Secured Loans

Share-secured loans are far from the only type of secured loans out there. Any loan that involves some form of collateral is considered a secured loan, and some of the most common forms of debt fall into this category, such as:

•   Mortgages, which utilize the home and property as collateral.

•   Auto loans, which utilize the vehicle as collateral.

•   Secured credit cards, as mentioned above, which require cash collateral.

Recommended: Using Collateral on a Personal Loan

The Takeaway: Is a Personal Loan Right for You?

Share secured loans are a secured type of personal loan, which can be used for a wide variety of expenses. Share secured loans are available for low-credit borrowers, so long as they have substantial cash savings — but there are other options available, too.

SoFi offers a range of unsecured personal loans with competitive interest rates and no origination, prepayment, or late fees. Checking your rate won’t affect your credit score^* and takes just one minute.

FAQ

Are share secured loans a bad idea?

Share secured loans are not an inherently bad idea, but they can cost the borrower more in interest than if they had paid cash for the purchase.

What is an example of a share secured loan?

The reasons people take out a share secured loan are much the same as reasons for taking out a personal loan: medical expenses, moving costs, home repairs and improvements, and more.

How do share secured loans work?

The borrower uses funds in their interest-bearing savings account as collateral to secure the share secured loan. If they fail to repay the loan, the lender can seize the savings account as repayment on the loan.

Photo credit: iStock/Julia_Sudnitskaya

^*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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