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Is It a Smart Idea to Get a Share Secured Loan?

Share Secured Loan - How Does It Work?
Austin Kilham

Austin Kilham

Updated July 26, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you need to borrow money but you don’t qualify for a traditional loan, a share secured loan can be worth looking into. What is it? A share secured loan is a personal loan that is secured using the balance in your savings as collateral. Because there is little risk involved for the lender, this type of loan generally has lower interest rates and fewer qualification requirements than other types of personal loans. A share secured loan can be a good choice for people who are establishing credit for the first time or those who are looking to improve their credit. However, they do come with a few restrictions and drawbacks. Here’s a closer look at how these loans work and when you might want to get one.

What Are Share Secured Loans?

Share secured loans, also known as savings secured loans, are loans offered by private lenders that use funds in an interest bearing account as collateral. Qualifying accounts include a savings account, a money market account, or a certificate of deposit (CD). Because the lender is at low risk of losing money on the loan, share secure loans typically have fewer qualification requirements than other types of loans. In fact, some lenders may not even check your credit as long as they’re able to verify that you have enough savings to cover the loan.

How Do Share Secured Loans Work?

Share secured loans work in a similar way to other types of loans for personal use. You receive the loan in one lump sum and then pay it back (plus interest) in equal monthly installments over the loan’s term. When your lender approves you for a share secured loan, they will put a hold on the savings account, certificate of deposit (CD), or money market account that you are using to secure the loan. That way, your lender guarantees that those funds will be available to them if you don’t repay your loan on time. Unfortunately, that also means that, while you’re paying back your loan, you won’t have access to your savings. How much you can borrow will depend on the lender. But, typically, the maximum loan amount will be 80% to 100% of your savings balance. Interest rates will also vary by lender. In many cases, the lender will set rates by adding 1% to 3% on top of the annual percentage yield (APY) your savings account earns. Even though your savings act as a kind of stop gap for your lender in case you default on the loan, you should still do your best to make payments on time. Late payments can have a negative effect on your credit score, which can be counterproductive if you’re looking to establish credit or repair damaged credit. It can be a good idea to set up automatic payments to ensure you make every payment on time and in full. Once you repay your loan, you’ll have access to your savings again. Recommended: Rewards and Disadvantages of Personal Loans

Benefits of a Share Secured Loan

There are several potential advantages to share secured loans. Here are some to consider.

Fewer Application Requirements

Because share secured loans are backed by your savings, they present very low risk to your lender. As a result, they generally have fewer application requirements than other types of loans, and the whole process can be relatively easy and fast. 

Inexpensive

While interest rates on share secured loans vary and will depend on the lender and your qualifications, they tend to be lower than rates for traditional loans. In addition, share secure loans typically don’t have origination fees, which increase the cost of borrowing for some other loans. 

Helps You Build Your Credit Score

Taking out a share secured loan and making on-time payments can help you develop a track record of responsibility. This can help you build your credit profile and positively impact your scores. Having higher credit scores can, in turn, help you qualify for other types of loans with competitive rates and terms in the future.

Multiple Uses

Many types of loans are designed for specific uses, such as auto loans for car purchases and mortgages for buying a home. By contrast, a share secured loan gives you cash that can be used for anything. It can be a good idea, however, to only use the loan to purchase goods or services that you genuinely need.

Qualifying for a Share Secured Loan

Applying for a share secure loan is typically a simple process. Here’s an easy step-by-step:1. Research lenders. Many banks and credit unions offer this type of loan, so it can be a good idea to shop around and compare rates, terms, and loan amounts before choosing a lender.2. Fill out an application. Some lenders allow you to do this online, while others require you to apply in person. Either way, you’ll need to supply some personal information, as well as information about the account you will use as collateral.3. Find out if you’ve been approved. In some cases, you may find out immediately after you submit your application if you’ve been approved. In others, you may need to wait to hear back. Once you are approved, you’ll typically have access to the funds right away.

Common Uses of a Share Secured Loan

In general, you can use funds from a share secured loan for any purpose. For example, you could use the money to fund home improvements, which could ultimately increase the resale value of your home. You could also use the funds to consolidate high interest debt, which could lead to lower payments and/or lower the total cost of those loans.

Disadvantages of a Share Secured Loan

One key disadvantage of a share secured loan is that you will have to pay interest on the loan. Interest rates are the cost of doing business with lenders, and they increase the cost of your purchase over time. Another potential negative is that this type of loan will temporarily tie up your savings. As long as your savings are acting as collateral for your loan, you won’t be able to touch it. If you need the savings for some other reason, even in the case of an emergency, you won’t be able to use it. Weigh this factor carefully as you consider a share secured loan. If you think you may need access to your savings before the loan term is up, it may not be the right choice for you.

Who Is a Share Secured Loan Best for? 

A share secured loan can be a good for:     
  • Someone with no credit Your on-time payments will likely be reported to the consumer credit bureaus, which can help you establish a credit history and track record of paying your bills on time. 
  • Someone with bad credit If you have a poor credit score, share secured loans can help you rebuild your credit profile as you make on-time payments. 
A share secure loan isn’t for everyone, however. Those who may want to consider other options include:
  • Someone who may struggle to pay back the loan If you are unable to fully repay the loan, the bank will take the money you have in savings and you will also owe interest. 
  • Someone who can qualify for other types of loans and credit A share secured loan can be a good way to start building credit if you have limited options, but it isn’t the only, or necessarily the best, one. One alternative is to get a secured credit card, which is a form of credit that requires an advanced deposit to secures future credit card purchases. There are also credit cards designed for people with thin or poor credit that won’t tie up your savings. Or, you might be able to qualify for a secured personal loan, which involves putting up an asset (such as a home or car) as collateral. 
  • Someone who does not need to build credit With a share secured loan, you will pay interest on money you already have. So, if you don’t need to build (or re-build) your credit, you may be better off simply using the money you have in savings instead of taking out a loan using your savings as collateral.
Recommended: Personal Loans vs Credit Cards 

The Takeaway

Share secured loans can be an important tool for individuals looking to build or rebuild their credit. They have fewer qualification requirements than many other types of loans, and typically come with relatively low interest rates. Unfortunately, this type of loan also ties up your savings. So if you want to maintain access to your savings, it may make sense to consider other loan options, such as a secured personal loan.If you’re curious about what personal loan rates and terms you might qualify for, Lantern by SoFi can help. With our easy-to-use online lending tool, you can instantly review and compare offers from multiple lenders.
Photo credit: iStock/milan2099
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC0222070

Frequently Asked Questions

What is a share secured loan?
What is the benefit of a share secured loan?
How does a share secured loan work?

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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