What is a share-secured loan?

Posted by Reinaldo Massengill on Wednesday, May 8, 2024
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If you’re looking for a way to establish or repair your credit and need some cash to pay for a large expense, a share-secured loan might be worthwhile. With a share-secured loan, you use your own savings as collateral. 

How does a share-secured loan work?

Also known as a savings-secured loan, a share-secured loan is a type of personal loan that uses money in a bank account as collateral. This may be a savings account, money market account, or certificate of deposit (CD). 

As you make timely payments, a share-secured loan can help you build a positive credit history. But if your payments are late or you default on your loan, your credit will suffer, just like it would with any other type of loan. Also, the lender will take the funds out of your account to pay back the debt, with interest.

The amount you can borrow with a share-secured loan depends on the lender. While some lenders will lend you your entire savings balance, others will set a maximum amount. You’ll likely repay what you borrow in monthly installments over a period between five and 15 years.

Where to get a share-secured loan

You can get a share-secured loan at a bank or credit union. In fact, it might be available at the places you already have savings accounts. A few examples of financial institutions that offer share-secured loans include:

Keep in mind that you will have to join a credit union to take out a share-secured loan with one.

When to consider a share-secured loan

Depending on your circumstances, there are a couple situations where taking out a share-secured loan could be beneficial:

  • You’re trying to establish credit: If you need to build or improve your credit, a share-secured loan can be a good option. Because you’ll use your savings as collateral, you’ll find it easier to get approved for a share-secured loan than a traditional personal loan or credit card. 
  • You have poor credit: A traditional personal loan can be difficult to obtain if your credit is poor, but you’ll have an easier time qualifying for a share-secured loan since you’re using your own savings as collateral. There’s less risk for the lender because of your collateral.

When not to consider a share-secured loan

However, there are also some situations where you should avoid getting a share-secured loan:

  • You might have difficulty paying back your loan: You should avoid a share-secured loan if you don’t think you can pay it back. If you can’t repay it, the bank or credit union will take the money out of your savings account, which you may need for emergencies or other expenses. 
  • You qualify for other forms of building credit: If you can qualify for a credit card or a different type of loan, you may be able to establish credit faster. 

Share-secured loans vs. secured/unsecured loans

A share-secured loan is a personal loan that uses the balance in your savings account as collateral. Compared to unsecured personal loans, share-secured loans are less risky for lenders and, in turn, come with lower interest rates because your savings are used as collateral.

You might also consider a secured personal loan, which may be backed by a valuable asset you own, like your car or boat. If you default on it, the lender will likely take your asset. 

An unsecured personal loan doesn’t involve collateral. Instead, it considers your credit score and offers the lowest rates to those with good to excellent credit. While an unsecured loan is harder to get, you won’t have to risk losing an asset.

Pros and cons of a share-secured loan

The benefits and drawbacks of a share-secured loan include: 

Pros

  • Lower interest rate: Because it’s secured by your savings, a share-secured loan is less risky for financial institutions than other types of loans. For this reason, they usually have lower rates.
  • Quick approval: Many banks and credit unions that offer share-secured loans, approve them right away or shortly after they receive your application. They’ll consider the funds in your account and won’t have to check your credit.
  • Chance to improve credit: A share-secured loan can be a valuable credit building tool. Just be sure to make on-time payments, every time.

Cons

  • Might lose your collateral: If you default on a share-secured loan, the bank or credit union will pull money from your savings account to recoup their losses. This may interfere with your ability to meet certain financial goals.
  • May hurt credit: Late or missed payments on a share-secured loan can take a toll on your credit. You should only take one out if you know you’ll be able to pay it back.
  • Savings might be frozen: Depending on the bank or credit union, the money in your savings account that’s equal to the loan amount may be frozen. This means you won’t have access to it until you repay your loan.

How to qualify for a share-secured loan

Follow these steps to qualify for a share-secured loan.

  • Shop around: Do your research and find out which lenders offer share-secured loans. Note that some banks or credit unions might only allow you to take one out if you secure it to a traditional savings account, while others are more flexible and accept CDs.
  • Compare your options: Once you find a few share-secured loans, decide which one is the best choice for your unique needs. Consider factors like borrowing amount, rates, and terms.
  • Apply: You’ll likely be able to apply for a share-secured loan online. But some lenders may require an in-person application process. Be prepared to share personal details as well as your desired loan amount, term, and purpose.
  • Wait for approval: Depending on the lender, you might get approved instantly or wait a bit for a decision. Upon approval, you can start to use the funds.
  • How to get a share-secured loan

    As you compare share-secured loans, consider the following:

    • Interest rates: The lower the interest rate, the less you’ll pay for your loan over time. Fortunately, you should be able to land a good interest rate on a share-secured loan, even if you don’t have the best credit.
    • Terms: Depending on the lender, terms for share-secured loans can typically range from five to 15 years. A shorter term means fewer interest payments. 
    • Fees: Some banks and credit unions charge fees for share-secured loans in addition to interest. Find out what they are to avoid unpleasant financial surprises. 

    Alternatives to share-secured loans

    If you decide that a share-secured loan isn’t a good fit, you might want to explore these alternatives. 

    • Secured credit card: With a secured credit card, you pay an upfront deposit to open the account. As you make on-time payments, you’ll be able to build your credit and qualify for a larger limit or even a traditional credit card. 
    • Credit-builder loan: A credit-builder loan is the opposite of a share-secured loan. When you take one out, the lender will deposit the funds into a savings account. You’ll have access to the money once you pay it off.
    • Credit card cash advance: A credit card cash advance is when you use your credit card to borrow money. You’ll receive the money upfront as cash and repay it shortly after with interest and fees.
    • Personal loan with a cosigner: If you’re unable to get a traditional personal loan because of your credit, consider applying with a cosigner. Ideally, they should have good credit to help you qualify for the loan. Speak with your lender to determine if they will accept a cosigner.

    Check out: How to pay off credit card debt

    FAQ

    Can I use any type of collateral for a share-secured loan?

    A share-secured loan requires money in a bank account as collateral. This means you can use the funds in a savings account, money market account, or CD, depending on the lender and its unique requirements. 

    Can I apply for a share-secured loan if I have bad credit?

    Yes. In fact, a share-secured loan is a great option for those with poor credit or no credit. They’re easier to qualify for than other types of loans, and can help you build or improve credit. Plus, they usually have low interest rates.

    How can I find the best share-secured loan rates?

    To land the ideal share-secured loan, shop around at different banks and credit unions with savings products. Compare interest rates, terms, and fees of all the options you find.

    See also: What are the common uses for a personal loan?

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