How do Shared Secured Loans work? | Personal loans and advice

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An equity-secured loan, also called a savings-secured loan, is designed for short-term borrowing needs and uses your own money in a savings account as collateral. In addition to providing a convenient way to borrow, shared secured loans can help establish and re-establish credit when repaid on time.

Here’s how to decide if a savings-secured loan is good for improving your credit.

How Secured Savings Loans Work

Equity-backed loans use an interest-bearing account—savings, money market, or certificate of deposit—as collateral. They are sometimes called equity-backed loans because they first became popular in credit unions, which designate members as having equity in the institution. However, banks and other lenders may call them secured savings loans.

“Nowadays there are a lot of companies dealing with that, so you can just go online and look for equity-backed loans, and compare them to find the one with the best terms,” ​​says personal finance consultant Michael Sullivan. for Take Charge. America, a nonprofit financial advisory agency. Using your money as collateral, the lender gives you a lump sum payment, charges you interest, and tracks your payments. “The important thing is that they will report your payments to the credit bureaus,” says Sullivan.

The downside, however, is that you can’t use the money in your savings account until you pay off the loan. “That’s why an equity-backed loan only really makes sense for building credit,” Sullivan says.

“With a secured savings loan, you put your savings account as collateral to secure the loan,” says Joe Pendergast, vice president of consumer lending at Federal Naval Credit Union. “Your savings always earn dividends and become available if you make monthly loan payments on time.”

If you are unable to repay the loan, the lender may keep your savings to pay off the debt. Plus, you’d defeat the whole purpose of the loan, Sullivan says. “If you get your payments wrong, it has the opposite effect on your credit. You have to pay it back as the terms require.”

Pendergast recommends setting up automatic payments to ensure you make payments on time each month. “In the long run, this will help boost your credit score and give you a stronger credit profile when you need to apply for other loans in the future,” he says.

Banks and credit unions may set different loan limits. For example, the maximum can be up to 100% of your savings or CD account balance, while the minimum can vary by institution and loan term. At Navy Federal, for example, secured savings loans with terms of 60 months or longer require a minimum loan amount of $25,000 to $30,000, says Pendergast.

Why use a loan secured by shares?

The main reason for obtaining a loan secured by shares is to establish credit. Here’s why:

  • An equity-secured loan is an easier type of installment loan to obtain than other products. Making installment loan payments on time can help boost your credit score because payment history carries the most weight in credit score calculations – representing 35% of your FICO score.
  • An installment loan can also improve your score because it improves your credit mix. The combination of credits, i.e. the types of credits you use, represents 10% of your score. Credit scoring models are favorable to people who use both installment loans and revolving credit accounts, such as credit cards, responsibly. If you already have a credit card, adding a secured savings loan to your credit history and paying it on time could add points to your score.
  • A loan secured by shares could also be used as a stepping stone to other types of credit. For example, if you want to buy a car, building your score with a stock-backed loan could make it easier to get a car loan.
  • Secured savings loans can provide you with convenient cash without assembly costs (because you could be accused of a home equity loan, for example). You can use them for almost anything, including debt consolidation or small home improvement projects.

How to qualify for a secured equity loan

One of the benefits of equity-backed loans is that they can be easier to obtain than other types of loans. personal loans.

Having your savings as collateral means that you assume all the risk. “If you don’t repay the loan, the lender can use all or part of the collateral to make up for the loss,” says Pendergast.

Depending on the requirements of the bank or credit union, approval for an equity-backed loan can be quick. You apply for the loan, then the lender verifies your savings and approves your loan application.

Unlike other types of loans, an equity-secured loan does not require a careful review of your credit rating for approval. Since you’re technically borrowing from yourself rather than the bank or credit union, eligibility may depend more on how much you have in your savings account.

That’s not to say your credit score doesn’t matter for a secured equity loan. Your credit history can always affect the interest rate you pay to borrow.

Conditions of guaranteed savings loans

Typically, credit unions or banks set the loan rate based on the interest rate on your savings account, adding 1-3% on top. If you get 1% interest on a CD, for example, you might only pay 2% to 4% on a stock-backed loan. At Navy Federal, for example, loans secured by savings are offered at the sharing rate plus 2% for terms up to 60 months, and at the sharing rate plus 3% for 61 to 180 months; Certificate-secured loans are available at the certificate rate plus 2% for a maximum term of 60 months.

And unlike a credit card, which has a variable interest rate, a secured equity loan usually has a fixed rate. This means your rate won’t increase over time, giving you predictability with payments and protection if interest rates rise after you take out the loan.

Also, the amount of time you have to repay an equity-secured loan can vary depending on the lender. Lenders typically allow five to 15 years to pay off a secured savings loan.

Extending the term of the loan can make it easier to pay off a larger secured loan, as it can lower your monthly payment. Remember that the longer the term of the loan, the more interest you will pay for the duration of the loan.

The benefit is that your savings continue to earn interest while you pay off the loan, Pendergast says. Any dividends you earn can help offset interest charges. Of course, since your loan interest rate is typically 1-3% higher than your deposit account interest rate, you will always pay more interest than you earn. But if you use the funds to pay off higher interest rate debt, you could still come out on top.

Alternatives to Credit Building Loans

Equity and savings secured loans aren’t your only options for building credit and meeting your short-term financial needs.

Credit-generating loans, offered by banks, credit unions and online lenders, involve the lender keeping the amount you borrowed in a bank account while you make payments to build up credit. You receive the money once the loan is repaid in full.

It’s a bit like a loan secured by shares, except that you don’t have to tie up your savings as collateral. And instead of accessing funds at the start of the loan, you get them at the end. Think of it as a structured savings plan that can help improve your credit history.

However, credit enhancement loans may not allow you to borrow as much as an equity-secured loan, as they are usually between $500 and $1,500.

There are secured and unsecured personal loans available for people who don’t have the best credit. With a secured personal loan, you’ll still need to offer the lender some type of collateral, although it doesn’t necessarily have to be cash savings. For example, you might be able to get a loan with a car title, a property you own, or an investment.

Secured loans can offer lower interest rates than unsecured loans because you reduce the risk to the lender, but like an equity-secured loan, you risk losing your collateral in the event of default.

An unsecured loan eliminates this risk, but expect a higher interest rate to offset the higher risk to the lender. Whether you can find a co-signerhowever, you should be able to get a better rate, Sullivan says.

There are also a number of credit card products designed for people with thin or poor credit history. “Some people can go out and get a store card or a gas card without too much trouble,” Sullivan says. “It may be a better way to build credit for some, because you’re not tying up your savings.”

If that doesn’t work, you can try a secure credit card, which usually requires a cash deposit. Aside from deposit, these cards work the same way as unsecured cards, with some even allowing you to earn rewards on your purchases.

Ultimately, borrowing and paying interest on your own money with a savings-secured loan only really makes sense if your goal is to build or rebuild your credit. “For people with poor credit,” Sullivan says, “these loans can be a valuable strategy.”

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