All You Need To Know About Equity Secured Loans | Smart Change: Personal Finances


If you need to take out a loan but don’t meet the minimum qualifying requirements, you could find yourself in trouble. Equity-backed loans help solve this problem by providing fewer qualification requirements, which can help you get a loan to build your credit. While they’re a great option for borrowers with bad credit, they come with their own restrictions, which we’ll help clarify for you.

What is a loan secured by shares?

A loan secured by shares is a secured loan who uses funds from an interest-bearing account – savings account, certificate of deposit (CD) or money market account—like collateral. Since the money in your account guarantees and secures the loan, if you fail to meet your repayment obligations, your bank or credit union may repossess the money in your account to recover its losses.

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Secured loans make transactions less risky for banks and credit unions because the collateral guarantees that they can get their money back one way or another. Due to this risk mitigation, secured loans generally have fewer qualification requirements, making the application process easier on your end. Some lenders won’t even check your credit until they can verify that you actually have enough savings for the loan.

You may have heard of an equity-secured loan by another name, including a savings-secured loan, a cash-secured loan, and a passbook loan. They are all the same thing.

How equity-backed loans work

Since savings-backed loans use money in your interest-bearing account as collateral, you will need a savings account, CD or money market account with cash to start. Regardless of the account you use, when you apply for a loan secured by shares, you agree to pledge this money to the bank while you repay the loan.

As for loan limits, you are generally limited to borrowing a percentage from your savings account. However, banks and credit unions may set different limits; you will typically see a minimum loan amount between $200 and $500 and a maximum amount between 80% and 100% of your balance.

Banks and credit unions also charge interest on these passbook loans. They usually set a fixed rate by adding 1% to 3% to the annual percentage yield (APY) of your account. For example, if your interest-bearing account earns 1% APY, the interest you will pay on your equity-secured loan will range from 2% to 4%.

Once the lender issues the funds, the money in your account is put on hold so you can’t access it. You will make fixed monthly payments over a period of five to 15 years, depending on your lender and the terms they offer. You can access your funds again when you repay your loan.

Although your funds are frozen while you repay the loan, your account will continue to earn interest. However, since the interest rate on your equity-secured loan is 1-3% higher than your APY, you will pay more interest than you earn.

Why should you use a secured equity loan?

At first glance, it seems a bit silly to borrow a large sum of money when you already saved that much in your account. But the main reason for using an equity-backed loan is to create credit. If you don’t have credit yet or have made a few mistakes in the past, an equity-secured loan can help get you on the right track.

After all, most other types of loans require you to have good credit to qualify. It is possible to find loans for bad credit (score as low as 580), but they will usually be very expensive and your qualification is not guaranteed. Equity-backed loans offer an easier path to credit.

How to get a loan secured by shares

  1. Save money: Secured cash loans allow you to borrow against the money you already have. You will need to make sure you have some cash on hand that you can use as collateral for your loan.
  2. Find a lender: Equity-backed loans aren’t widely available, but they do exist if you look for them. They are more common at credit unions, but be sure to pay attention to the membership requirements, as you may not be eligible to join all credit unions (and therefore, you may not be eligible for all secured loans by shares). If you are currently a member of a credit union, check to see if they offer equity-backed loans.
  3. Compare rates: If you have more than one option to choose from, request a quote. Make sure they make a soft credit draw if they check your credit to protect your score.
  4. Deposit your money: When you find the right lender, it’s time to open an account and deposit your savings. The lender will be able to tell you what type of account you should deposit your money into, whether it’s a savings account, CD or money market account.
  5. Apply for the loan: Once your account is open, you can complete your loan application. If you are approved, you will receive your funds and your account will be frozen until you repay the loan.
  6. Sign up for automatic payment: This step is optional but strongly encouraged. The only reason to take out an equity-backed loan is to build credit, and the most important factor that does your credit score is your payment history. Making even one late payment can completely derail your efforts. Signing up for automatic payment avoids this by ensuring that all your payments are made on time.

Alternatives to Savings-Backed Loans

Equity-backed loans help you build credit, and they help you do it for less. But they’re not the only option you have. Review these alternatives before applying for a secured equity loan.

Credit-generating loan

If you haven’t accumulated any money yet (and many of us don’t), a little credit builder loan might be a better option for you. These loans are not secured by anything, so they may come with a higher interest rate. As with equity-backed loans, you may have better luck finding them at a credit union than at a bank.

Secured personal loan

If you have something of value but not necessarily a savings account, a secure account Personal loan might be a better option for you. It works very similarly to a loan secured by equity, except you use something else as collateral, usually a vehicle, such as a car, boat, or motorhome. You can get personal loans from banks, credit unions or online lenders.

Secure credit card

Finally, another good choice is a secure credit card. Secured cards have credit limits equal to a cash deposit made by you and held in a security account. As long as you make all your payments on time, opening a secured card can help you build credit because it shows creditors your ability to manage debt responsibly.

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