by Aidan Kang, CFA
Senior Writer
UPDATED: March 27, 2022

If you need some extra cash, getting a loan is a good way to fill the financial gap. There are many kinds of loans designed to suit your needs. You can get a car loan to help you buy a car, a mortgage to buy a house, a payday loan to tide you over until your next salary, or a personal loan to cover that emergency expense. 

But are you aware that you can get a loan where you borrow against your savings? These are called share secured loans offered by credit unions.

A share secured loan is different from other types of loans because you need to have money saved up before you get a loan. These funds will serve as collateral or guarantee in case you won’t be able to pay back the loan that you took out from the bank or credit union where you’re a member. It’s also useful when you want to rebuild credit.

How Do Share Secured Loans Work?

What exactly happens to your savings when you take out a loan such as this one? Let’s say you’re a member of a credit union and you have $1,000 saved up in your savings account. 

This month, you found out that you’re short $700 but you don’t really want to touch your savings. Your credit union is offering a share secured loan where you can borrow up to 100% of what you’ve saved up.

You decided to get a share secured loan worth $700 instead of withdrawing the money from your savings. Because you’re guaranteeing your savings as collateral for the loan, your credit union will most likely grant you the loan easily instead of checking your credit score as a basis for approval. You can then use the money for whatever purpose you need and you can pay back the money plus interest in small monthly installments.

While you’re paying back the loan, the credit union will freeze the amount that you borrowed in your savings. This means you cannot withdraw or use this money unless you pay back your loan in full. Some credit unions, however, will release the amount that you have paid back already.

Who Are Share Secured Loans Best For?

There are people who could benefit from share secured loans the most. If you fall into one of the categories below, a share secured loan might be something that could help you out.

  • People Who Want To Keep Their Savings Intact For Personal Or Business Reasons. One of the scenarios where share secured loans make sense is when you don’t have a choice but keep money in your bank account. There are some instances when you need to have your savings untouched. 

Some people, for example, need to show their bank statements as financial evidence or proof of funds when applying for a travel visa, applying for a university, or securing a business deal. In case you need emergency funds, you may not want to drain your bank account so you can have your proof of funds intact.

  • People Who Want To Improve Their Credit Score. Your payment history makes up 35% of how your score is calculated. According to the FICO website, your track record in repaying your debt tends to be the strongest predictor that you can pay back what you’re borrowing. This makes you a good risk. 

The problem, however, is that if you have bad credit or zero credit history, you won’t really get approved for most loans or loans that are available to you that have unreasonable interest rates. 

Is there a secured loan to build credit? This is where share secured loans become useful. 

In this situation, you have the money but you want to increase your credit score so you can qualify for future loans or get a better loan’s interest rate in the future. The good thing with share secured loans is that even if you have bad credit, you won’t have to be penalized with a super high-interest rate just to build credit.

When Should You Turn to Share Secured Loans?

You can use share secured loans for various reasons, such as the following:

1. You’re not able to get a loan for a specific purpose

Unlike other types of loans that can only be used for a specific purpose, such as an auto loan, secured loans can serve different purposes. 

That’s why share secured loans are a good “catch-all” loan for any purpose where there aren’t specific loans available. 

However, the general rule must still be followed and that’s to use them only when you’ve exhausted all other options.

2. You Want to Build Credit

If you want to improve your credit score by building a good payment history, a share secured loan is an easy one that you can get approval for. 

Building credit could save you a lot of money in interest rates when you decide to take on a major purchase like a mortgage or a car loan.

3. You Don’t Want to Touch Your Savings

One of the top benefits of share secured loans is that you can keep your savings untouched in your account and use those savings as a guarantee to borrow an equivalent amount that you can use immediately.

4. You Need Quick Access to Funds

You don’t need to go through the hassle of applying for a typical loan because your credit union considers it low risk. The requirements of deposit secured loans are minimal and not as stringent as other types of loans.

How To Qualify and Apply For A Share Secured Loan From A Credit Union?

It’s easy to qualify for a share secured loan since you’re actually borrowing from yourself. It’s a savings secured loan wherein you can use collateral, such as the assets in your savings account. Your credit score may not affect the approval of your application but it will have a significant impact on the interest rate.

If you’re a credit union member and you have money saved up, you can check whether this is something your credit union offers. You can usually borrow a portion of or the equivalent amount of your savings. 

The exact loan limits will depend on your credit union’s policies. Fill out an application form with them and wait for the approval, which varies among credit unions.

What Are the Disadvantages of Getting a Share Secured Loan?

All types of loans have advantages and disadvantages. Depending on your specific situation and your particular need, one could benefit you better. To help you decide whether a share secured loan is good for you, here are some of the disadvantages that you need to know.

1. You’re Paying Additional Interest Fees

What many people don’t realize is that when you take out a share secured loan, you won’t only pay back the money that you owe because you have to pay that money back PLUS interest. Granted that the interest is typically lower than other loans, it’s still 1% to 3% higher than the interest you will earn from your savings account. 

So, if you don’t want to withdraw the money in your savings account because it’s earning interest, the hard truth is that the interest you’ll pay from getting this type of loan is higher than what you’ll earn by keeping the money in your bank account.

2. The Funds in Your Account Will Be Frozen

When you take a share secured loan, the money in your savings account will be unavailable to you. Let’s say you have $500 in your account and you take a loan for $500. You will only get to spend that $500 loan amount. If by any chance you need more money, you won’t be able to withdraw the funds until the loan amount is paid back.

3. It Does Not Give You Extra Funds

Most people take out loans because they need extra money. A share secured loan isn’t for people who are in this situation. It won’t grant you money that you don’t already have. It’s different from getting payday loans or online personal loans because while you may have to pay astronomical interest rates, you get extra cash whether you have savings or not.

What Are the Alternatives to Share Secured Loans?

Other options available aside from secured loans if you’re looking to build credit score or meet your short-term financial goals include the following:

  • Secured credit card – It’s attached to your cash deposit account. The amount that you have deposited will be your credit limit. Your money will be removed from your account if you fail to pay your dues.
  • Credit builder loan – It’s similar to a share secured loan except that you have to settle your loan payments first before you can access the money. The lender will deposit the funds into your account.
  • Secured personal loans – It’s a type of loan that requires collateral. You can use your assets like your car to secure the loan. If you fail to pay, the lender will seize the asset to recoup its losses.

Is A Share Secured Loan For You?

If you need extra cash, a share secured loan isn’t going to help you. It’s also not a good deal if you’re trying to protect the dividends you’re earning from your savings because the interest fees you’ll pay are higher. It’s much better to just withdraw your savings and save money again. However, a share secured loan could still be useful as a credit builder loan or if you need to keep your savings intact as proof of funds for other purposes.