The money in your savings account can perform double duty. The funds generally accrue interest, thereby increasing the value of your principal deposit. Those same funds can also serve as the basis for a savings secured loan. This loan product can be a convenient way to access needed cash without withdrawing the money from your account. It may also help rebuild your credit.
Savings Secured Loans
A savings secured loan carries little risk for the lender since the collateral for the loan is the money deposited in a savings account with the lending bank. As such, a loan approval for a savings secured loan may be easier to obtain than an approval for an unsecured loan. The bank may allow you to use a certificate of deposit as collateral instead of a savings account. A secured loan on a certificate of deposit gives you access to the funds while avoiding the early withdrawal penalty you'd pay if you accessed the CD directly. Because the deposited funds are used to secure the loan, you generally cannot withdraw them until the loan is repaid. However, the funds will still continue to accrue interest. Also, the bank may permit you to repay the loan early without a prepayment penalty.
The bank may guarantee approval for the loan as long as you have funds in a savings account or certificate of deposit to secure it. The amount of the loan is usually limited to the amount of money within the savings account or certificate of deposit. Savings secured loans generally have a low interest rate, which varies among lenders but is usually a fixed rate. This interest rate may be affected by the length of the loan, and a shorter loan term may result in a lower rate.
Banks will generally approve a savings secured loan even if you have tarnished credit or no credit. A savings secured loan is an installment loan. Although the loan is secured by a deposit, you’re still required to make monthly payments until it's paid off. How well you handle the loan account can have a major impact on your credit score. For example, according to the Fair Isaac Corporation, originators of the FICO scoring model, the payment history on your credit accounts represent 35 percent of your FICO credit score, which ranges from 300 to 850. On-time payments generally have a positive effect on your credit and can improve your credit score. Late payments usually have a negative impact and may lower your score. If your goal for taking out the loan is to rebuild or establish credit, check with the financial institution to ensure it reports savings secured loans to the credit bureau.
A default on a savings secured loan can jeopardize your savings. A default occurs when you fail to honor the terms of the loan agreement, such as making your loan payments. If you don’t repay the loan, the lender may seize the funds from your account that were used as collateral for the loan. In addition, the lender may impose late fees and other penalties, which could increase the amount of the debt. A loan default can also jeopardize your credit, since the lender may report the negative account history to the credit bureau.
Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.