SHARE

Take control of your financial future with Penny Calling Penny!


    How Do Share-Secured Loans Work?

    Disclaimer: Penny Calling Penny is an affiliate website. This means that we get a small commission when you click some of the links in this article. Don’t worry – we’ll never recommend anything we wouldn’t use ourselves.

    Let’s say you need to take out a loan but do not meet the minimum requirements. If this is the case, you may find yourself in a difficult situation. Fortunately, that’s where share-secured loans come in handy.

    They reduce this issue by providing you with fewer qualification requirements which will help you to get a loan and start building your credit.

    Share-secured loans are a brilliant option for people with bad credit looking to borrow money for the short term. However, they have restrictions, much like any other loan.

    If you want to learn what the share secured loan meaning is, how it works, and how to qualify for such a loan, this article has got you covered.

    What Is A Share-Secured Loan? 

    This type of loan is designed for short-term borrowing and uses assets in a share account, commonly known as a savings account, to officially back up the loan (as collateral).

    When taking out these types of loans, all the equivalent assets in your savings account – as the borrower — will be frozen until the loan can be fully repaid.

    These loans typically have a repayment timeline of between five and 15 years. 

    However, the exact figure depends on the type of lender dealing with the loan.

    Why Are They So Convenient?

    Secured loans make all transactions for credit unions and banks far less risky. This is because the collateral guarantees they will get their money back somehow.

    Due to this risk mitigation, share-secured loans tend to have far fewer qualification requirements, making the application process much easier for the borrower.

    Some lenders will not check a borrower’s credit provided they can verify enough savings to cover the loan.

    How Do Share-Secured Loans Work?

    Share-secured loans use various forms of interest-bearing accounts as collateral. This may include money market, savings, or even a certificate of deposit. They’re often referred to as share-secured loans as they first achieved popularity at credit unions, which refers to members as having different shares of the institution. Once a borrower has been approved for one of these loans, a lender will put a hold on the amount of savings they are borrowing against.

    The loan can be repaid via automatic monthly withdrawals, a monthly check, or a direct deposit. If you cannot repay the loan at any point, the savings taken as collateral will be used to cover the cost of the loan.

    Avoid defaulting or making late payments, as it could cost valuable penalties. It may even leave a mark on a borrower’s credit history.

    Why Should You Use a Share-secured Loan?

    It may seem unnecessary to borrow money when you already have that amount in your savings. It might also feel a lot riskier than other loans because savings are on the line.

     Despite this, a couple of major benefits are associated with using a share-secured loan. We have outlined the most important ones below.

     ● Build credit: if you’re someone that has no credit or bad credit, a share-secured loan will be a great tool to set you on the right track. Each time you make payments to pay off the loan, it will be recorded, and you will receive a credit boost. Using a share-secured loan provides a much easier path to building credit.

    ● To Cover Many Purposes: these loans can be used as cash flow for just about anything (within reason, of course). Generally, they should only be used to cover the cost of something you need but cannot afford to pay the upfront cost.

    ● Save on Future Loans: they may cost you more now, but these loans will result in a higher credit score. In the future, this should help you save money via lower loan interest rates.

    Things To Consider Before Taking Out A Share-Secured Loan

    There are some potential risks when it comes to this borrowing as it’s different from nearly every other type of loan. Not only will savings become inaccessible if a share-secured loan is taken out, but it could wipe out your entire balance if a default occurs!

    Fortunately, there are two key ways to prepare before considering taking out this loan.

    To begin with, you must make sure to familiarize yourself with the ins and outs of the loan and read the fine print before you sign on. This will show you the exact terms of the agreement, so you understand more about what you are entering into.

    You must also consider your financial situation. It’s super important to understand the financial aspect of the loan to ensure you can cover the cost of the repayments and make them on time.

    How To Qualify

    It may be much easier to qualify for one of these loans than other types. Using your savings as collateral means taking on and accepting all the risks.

    You should begin by researching the different lenders out there that offer this sort of loan.

    Depending on the lender’s requirements, whether a credit union or a bank, the approval process for a share-secured loan may be pretty straightforward. All you need to do is apply for a loan and then wait for the lender to verify your savings and approve the loan application.

    Again, a share-secured loan does not require borrowers to have a good credit score to be approved, although it may impact the interest rate you will pay to borrow the money.

    As you are technically borrowing money from yourself, whether you qualify may depend solely on the amount you have tucked away in your savings.

    Summary

    Using a share-secured loan to borrow money only makes sense if your main goal is to build up or completely rebuild your credit score. They can prove to be a valuable strategy for increasing your credit without much of an issue.

    Leave a Comment

    0 Comments
    Inline Feedbacks
    View all comments

    About

    About

    "“When getting help with money, whether it is insurance, real estate or investments you should always look for a person with the heart of a teacher, not the heart of a salesman.”"

    Dave Ramsey

    You May Also Like

    You May Also Like

    SEARCH