If you ever need some extra cash, getting a loan is a good way to fill up 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.
But what exactly are share secured loans? Are they even worth looking at? Is getting a share secured loan a good deal? And when is this type of loan useful? In this article, we’re going to talk about share secured loans and give you an unbiased take on this type of loan.
What is a Share Secured Loan?
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 credit union where you’re a member.
How is it different from a typical loan? With most types of loans, you are borrowing money because you don’t have the funds to pay for whatever expense you have. With a share secured loan, you actually have the money but you’re taking a loan because you don’t want to withdraw that money from your savings account as you want to keep it there for whatever reason you have.
How Does a Share Secured Loan Work?
What exactly happens to your savings when you take out a loan such as this one? Let’s say you are 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 the amount you have saved up.
You decided to get a share secured loan worth $700 instead of withdrawing the money from your savings. Because you are 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 are 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 in any event unless you pay back your loan in full. Some credit unions, however, will release the amount that you have paid back already.
How to Apply for a Share Secured Loan?
In terms of the ease of getting a share secured loan, the process is usually quick and easy. If you are a credit union member and you have money saved up, you can check whether this is a loan offered by your credit union. You can usually borrow a portion or the equivalent amount of your savings. The exact limit will depend on your credit union’s policies.
Because you have your savings as a guarantee, it is considered as a low-risk loan. With other types of loans, you need to prove that you are trust-worthy to pay back that money for lenders to approve your application. The lender will usually need to check your credit history to be able to determine your ability to pay. If you have a good credit score, you can get approved for a loan with favorable interest rates. If you have a poor credit history, the lender may require you to provide collateral before lending you money. If you are not able to pay back the money you owe, the lender will take the property you put up as collateral in exchange. These loans are called “secured loans”, as opposed to an “unsecured loan” where a collateral is not required.
For example, if you put your car as a collateral for a TitleMax loan or your house to get a personal loan, the lender could repossess your car or house if you default on the payments. Many people who go for secured loans are usually those who need a large amount of money or those who have a very bad credit score.
With a share secured loan, instead of putting your house or your car as a collateral, you are putting up the money you have saved up in your account as the guarantee. When you’re granted a share secured loan, the equivalent amount in your savings will be frozen and if you are unable to pay back the money, the credit union will take the money from your savings.
What credit score is required for a share secured loan? The good news is that most credit unions do not take into account your credit score as one of the requirements to get a share secured loan. As long as you already have the money to put up as a collateral, you could be granted this loan.
What are the Pros and Cons of a Share Secured Loan?
All types of loans have advantages and disadvantages. Depending on your specific situation and your particular need, one loan could benefit you better. To help you decide whether a share secured loan is good for you, here are some pros and cons of this type of loan.
Advantages of a Share Secured Loan
Keep Your Savings Intact. One of the top benefits of a share secured loan is that you can keep your savings untouched in your account and use those savings as guarantee to borrow an equivalent amount that you can use immediately.
Quick and Fast Approval. With a share secured loan, you don’t need to go through the hassle of applying for a typical loan because your credit union considers it a low-risk loan. The requirements are very minimal and not as stringent as other types of loans.
You Can Build Credit . If you want to improve your credit score by building good payment history, a share secured loan is an easy type of loan that you can get approval for. When you have a better credit score, this 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.
Disadvantages of a Share Secured Loan
You’re Paying Additional Interest Fees. What many people do not realize is that when you take out a share secured loan, you will not 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 is 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 of the interest it’s earning, the hard truth is that the interest you’ll pay from getting a share secured loan is higher than what you’ll earn by keeping the money in your bank account.
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 share secured 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.
It Does Not Give You Extra Funds. Most people take out loans because they need extra money. A share secured loan is not for people who are in this situation. It will not grant you money that you don’t already have. This is different from getting a payday loan or an online personal loan because while you may have to pay astronomical interest rates, you get extra cash whether you have savings or not.
Who Would Benefit from a Share Secured Loan?
At this point, you probably understand already that a share secured loan is a type of loan where you’re essentially borrowing from yourself. The catch is that you’re paying the credit union interest fees to do that. If you think about it, it doesn’t really make sense. Why would you take out a loan and pay interest if you have the money anyway? Especially so if the interest fees are higher than what your savings will earn in dividends. If you need the money, it’s better to just withdraw the cash and save up again rather than get a share secured loan.
However, there are still people who could benefit from a share secured loan. If you fall into one of the categories below, a share secured loan might be something that could help you out.
1. People who want to keep their savings intact for Personal or Business reasons.
One of the scenarios where a share secured loan makes 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 statement 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.
For example, maybe you are in the process of applying for a student visa to travel and study abroad. Universities and immigration agencies would usually require that you show financial evidence that you can afford the living costs associated with studying abroad so they may require a bank statement that dates back 3 to 6 months. It is then logical not to touch your savings so you can show that you have money in the bank.
2. People who wants 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 a bad credit score or zero credit history, you won’t really get approved for most loans or loans that are available to you have unreasonable interest rates. So how can you rebuild your credit then? This is where a share secured loan becomes 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 better interest rates 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 super high interest rates just to build credit.
Is a Share Secured Loan for You?
If you need extra cash that you don’t already have, a share secured loan is not going to help you out. It is also not a very good deal if you’re trying to protect the dividends you’re earning from your savings because the loan interest fees you’ll pay are higher. It’s much better for you to just withdraw the money and save up again. However, a share secured loan could still be useful as a credit-building tool or if you need to keep your savings intact as proof of funds for other purposes.