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.
Key Points
• Share secured loans use savings account funds as collateral, enabling funding of expenses without depleting savings.
• They assist in credit building, beneficial for those with limited credit history.
• These loans offer lower interest rates compared to unsecured loans due to reduced lender risk.
• Eligibility requires funds in an interest-bearing savings account, which are held during the loan term.
• While advantageous, they entail interest costs and the risk of losing savings if not repaid.
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 Does a Share Secured Loan Work?
In order to take out a share secured loan, you must first have money saved in an interest-bearing savings account. Your savings account balance will be used as collateral. 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, usually between about 80% to 100% of those funds. They may also list a loan minimum.
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 2.00% APY, your loan interest rate might be 3.00% to 5.00%. Typically, share secured loans come with lower APRs than unsecured loans, since they’re less risky for lenders.
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.
Flexible Repayment Options
With a share secured loan, you can often choose a repayment term that suits your needs and financial plans. Many lenders offer terms within the 36- to 60-month range.
Credit Building
Finally, one of the most important benefits of share secured loans is their power to help you improve or build your credit, which can help you qualify for other types of loans in the future. Credit building and credit improvement are two 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.
Are Share Secured Loans a Bad Idea?
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.
That said, there are times when a share secured loan may make sense:
• You’re a first-time borrower. A share secured loan offers you access to credit without requiring you to have a lengthy credit history.
• Your credit is poor. By making consistent payments on the loan, you can rebuild and repair your credit.
• You need help paying for an emergency expense. A share secured loan helps you cover unexpected bills without depleting your savings.
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 share secured 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, 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. 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 that 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.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a 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.
Why would someone take out 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
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