What Is a Passbook Loan?

A passbook loan is a type of secured loan that allows individuals to borrow money using their savings account balance as collateral. These loans typically have low interest rates and can help borrowers who don’t have strong credit.

Keep reading to learn how passbook loans work, their benefits, and the potential risks to consider before taking one out.

How a Passbook Loan Works

Passbook loans are secured loans offered by banks and credit unions that let you use money in your savings account as collateral. You may be able to borrow most or all of the total amount that’s in your account. But if you don’t pay back the loan, the bank will take what you owe from your savings account. 

Typically, the bank will place a hold or lock on the money you’re borrowing from your savings. However, the money will continue to earn interest. As you make payments on the loan, the bank generally releases the hold on the equivalent amount of money in your account. Once you pay off the entire loan, you’ll have access to all the money in your account again.

Where Can I Get a Passbook Loan? 

Passbook loans are typically offered by banks and credit unions. You’ll need a savings account to get a passbook loan.  

Is a Passbook Loan a Share-Secured Loan?

A passbook loan is sometimes called a share-secured loan. They are the same thing.

There are other types of asset-based lending in which you put up assets like property or jewelry to secure a loan. But with a passbook loan or share-secured loan, money in your savings account is the collateral.

Should You Get a Passbook Loan?

If you don’t have established credit or you have a low credit score, a passbook loan could have some benefits for you. Every time you make an on-time payment for the loan, it may be reported to the credit bureaus. Over the life of the loan, consistent, timely payments could help your credit profile.

A passbook loan might also be an option to consider if you aren’t eligible for other types of financing, or if the only other loans you qualify for have high interest rates. A passbook loan may offer a lower interest rate, since your savings account balance is the collateral.

Recommended: Need to Borrow Money? 9 Ways to Consider

Pros of Passbook Loans

Passbook loans have advantages, including:

Interest Rates 

Because you’re securing a passbook loan with the money you have in savings, you may get a lower interest rate than you would with other financing options.

Minimal Requirements 

There are generally fewer requirements to qualify for a passbook loan than there are for other loans. 

Rebuild Credit 

When you make payments regularly and on time each month, a passbook loan could help you establish credit. 

Interest From Savings 

The money in your savings account — including the amount that’s on hold for the loan — continues to earn interest. That could help lower the cost of taking out a passbook loan.

Passbook Loan Alternatives

If a passbook loan doesn’t seem like a good fit for you, there are other options to consider, such as:

IRA Loan 

If you have a traditional or Roth IRA, unfortunately, there is no such thing as an IRA loan. However, if you are 59 ½ or older, or you need money for certain qualifying exceptions like buying your first home or paying for education, you may be able to withdraw funds from your retirement account without paying penalty fees. But borrowing from an IRA can be risky, and there may be tax implications involved, so be sure to do your research and weigh the risks carefully.

Credit Card 

You could choose to use a credit card to help fund purchases you can’t pay for in cash. Many credit cards offer rewards for spending that you can use for travel, cash back, or other perks. When comparing credit cards, you might want to look for one that provides rewards. 

But credit cards do have high interest rates, so unless you can pay off the balance each month, using a credit card might cost you.

Cash

If you can set aside a little extra money each month, you may be able to pay for your purchase in cash. That way, you won’t owe any interest. However, you may have to wait for a while to save up all the money you need. Plus, you could end up draining your savings account.

Personal Loan

Another option is to finance your purchase with a personal loan. With a personal loan, a bank, online lender, or credit union lends you a lump sum that you repay with interest in installments over time. Personal loans are flexible and may be used for almost any purpose. 

One benefit of a personal loan is that they usually have lower interest rates than credit cards. You can explore personal loan rates to look for a loan that fits your needs. 

Personal loans also offer fast funding. Once you’re approved for a personal loan, you may expect to receive funds quickly, typically within one to five days. But personal loans may also come with fees. Explore the pros and cons of personal loans to help decide if this option is right for you.

The Takeaway

If you need to borrow money and you don’t have strong credit, a passbook loan might be an option to consider. The money in your savings account will secure the loan, which may help you get a lower interest rate. However, you won’t have access to that money in your savings account until the passbook loan is repaid. 

A personal loan is another way to borrow money, and one that you may want to explore. Lantern by SoFi can help. Just fill out one simple application and you’ll get offers from multiple lenders in our online marketplace. This can make it convenient to find loan terms that fit your needs.

Explore personal loan options and rates with Lantern.