How Do Shared Secured Loans Work?
A secured equity loan, also known as a secured savings loan, is designed for short-term borrowing needs and uses your own…
A secured equity loan, also known as a secured savings 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 build and replenish credit when paid off on time.
Here’s how to decide if a secured savings loan is suitable 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 referred to as secured equity loans because they first became popular with credit unions, which refer to members as having stock in the institution. However, banks and other lenders can call them secured savings loans.
“There are a lot of companies today that deal with that, so you can just go online and search for equity-backed loans, and compare them to find the one that offers the best deal,” says Michael Sullivan, personal finance consultant. 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 keeps track of your payments. “The important part is that they will report your payments to the credit bureaus,” says Sullivan.
[Read: Best Bad Credit Loans.]
The downside, however, is that you can’t use the money in your savings account until you’ve paid off the loan. “This is why a loan secured by stocks really only makes sense for construction credit,” says Sullivan.
“With a secured savings loan, you put your savings account as collateral to save the loan,” says Joe Pendergast, vice president of consumer loans at Federal Navy Credit Union. “Your savings always pay dividends and become available if you make monthly payments on time for the loan. ”
If you don’t pay off the loan, the lender can keep your savings to pay off the debt. Plus, you would defeat the whole purpose of the loan, Sullivan says. “If you mess up your payments, it has the opposite effect on your credit. You must pay it as the conditions 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 more loans in the future,” he says.
Banks and credit unions can set different loan limits. For example, the maximum may be up to 100% of your savings or CD account balance, while the minimum may vary depending on the institution and the length of the loan. At Navy Federal, for example, guaranteed savings loans with terms of 60 months or more require a minimum loan amount of $ 25,000 to $ 30,000, Pendergast explains.
Why use a shared secured loan?
The main reason for getting a secured equity loan is to build up credit. Here’s why:
– An equity loan is a type of installment loan that is easier to qualify for than other products. Making installment loan payments can help boost your credit score, as 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 credit mix – that is, the types of credit you use – make up 10% of your score. Credit scoring models favor 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 off on time could add points to your score.
– A loan guaranteed by shares could also serve as a springboard to other types of credit. For example, if you want to buy a car, building your score with a secured loan per share could make it easier to qualify for a car loan.
– Secured savings loans can provide you with liquidity in a convenient way 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 advantages of secured equity loans is that they can be easier to obtain compared to other types of loans. personal loans.
Having your savings as collateral means 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,” Pendergast explains.
Depending on the requirements of the bank or credit union, approval of a secured equity loan can be quick. You apply for a loan, then the lender checks your savings and approves your loan application.
Unlike other types of loans, a secured equity 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 be more dependent on how much you have in your savings account.
This doesn’t mean that your credit score doesn’t matter for a loan secured by equity. Your credit history can still affect the interest rate you pay to borrow.
Guaranteed savings loan conditions
Typically, credit unions or banks set the loan rate based on the interest rate on your savings account, adding 1-3% more. If you get 1% interest on a CD, for example, you might only be paying 2-4% on a loan secured by stocks. At Navy Federal, for example, guaranteed savings loans are offered at the participation rate plus 2% for terms of up to 60 months, and the participation rate plus 3% for 61 to 180 months; Loans secured by certificate are available at the certificate rate plus 2% for a period of up to 60 months.
And unlike a credit card, which has a variable interest rate, a secured equity loan usually has a fixed rate. This means that your rate will not increase over time, giving you predictability in payments and protection if interest rates rise after you take out the loan.
In addition, the time you have to repay a secured loan per unit may vary depending on the lender. Lenders typically allow five to 15 years to pay off a secured savings loan.
Extending the loan term can make it easier to repay more of the secured loan because it can lower your monthly payment. Remember, the longer the term of the loan, the more interest you will pay over the term of the loan.
The upside is that your savings continue to earn interest while you pay off the loan, Pendergast explains. Any dividends you earn can help offset interest costs. Of course, since the interest rate on your loan is typically 1% to 3% higher than the earning rate on your deposit account, you will always pay more interest than you earn. But if you use the funds to pay off higher interest rate debt, you might still get away with it.
[Read: Best Debt Consolidation Loans.]
Credit loan alternatives
Secured stock and savings loans aren’t your only options for building credit and meeting your short-term financial needs.
Homeowner 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 after the loan is fully paid off.
It’s a bit like a secured equity loan, except you don’t have to tie up your savings as collateral. And instead of accessing the funds at the start of the loan, you get them at the end. Think of it as a structured savings plan that can help you improve your credit history.
However, home builder loans may not allow you to borrow as much as a secured equity loan, as they typically range between $ 500 and $ 1,500.
There are secured and unsecured personal loans for people who do not have the best credit. With a secured personal loan, you will still need to offer the lender some type of collateral, although it doesn’t have to be cash savings. For example, you might be able to get a loan with a car title, property you own, or an investment.
Secured loans may offer lower interest rates than unsecured loans because you reduce the risk to the lender, but like a secured equity loan, you risk losing your collateral if you default on your payment.
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-signer, however, you should be able to get a better rate, Sullivan says.
[Read: Best Personal Loans.]
There are also a number of credit card products designed for people with poor or poor credit records. “Some people can go out and get a store card or a gas card without much hassle,” says Sullivan. “It may be a better way to build credit for some because you don’t tie 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 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 secured savings loan only makes sense if your goal is to build or replenish your credit. “For people with poor credit,” says Sullivan, “these loans can be a valuable strategy.”
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