What is a Share Secured Loan and How Does it Work?
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ExpertiseTrevor Mahoney is a financial services writer and content creator based out of Los Angeles, California. He holds a Bachelors of Science in Finance from Santa Clara University. In his free time, he enjoys hiking and lounging on the beach.
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You may have heard of a share secured loan before but were unsure what the term meant. These unique types of loans can be extremely beneficial depending on your financial situation, so read this guide to gain an understanding of whether this loan type is right for you.
What is a share secured loan?
A shared secured loan, as implied by the name, is a secured loan type that uses the assets in a shared account as collateral. This shared account, better known as a savings account, is simply security for the lender in the event that a borrower defaults on their loan and can’t meet payments.
How do share secured loans work?
Offered by both banks and credit unions, a share secured loan to build credit will place a hold on your savings account in the amount of the loan. As the repayments begin, you can choose to have the funds automatically withdrawn or you can pay using a direct deposit. If you default on the loan, the frozen funds will be used to cover the loss.
How do share secure loans differ from other secured loans?
Share secured loans are only one type of many different secured loans, though they differ slightly from others offered. The primary difference between a share secured loan vs. secured personal loan is that the former uses cash as collateral. Other secured loan types may use collateral such as:
- Mortgage-backed equity
- Home equity loans
- A vehicle or other physical item of value
While these all have different types of collateral, they are all secured forms of lending.
Is a shared secure loan a good idea for you?
Whether or not a share secured loan is right for you depends on several personal and financial factors. These loans will often have lower interest rates (due to the presence of collateral) and may be easier to receive if you have a substandard credit score. Additionally, a shared secure loan builds credit excellently and can be used to improve your overall credit history.
The largest potential drawback for a share secured loan is the fact that it puts your savings account at risk. If you don’t have a lot of money saved to begin with, you stand to potentially lose most of your emergency bucket in the event that you default on the loan.
Pros and cons of a share secured loan
As with all types of loans, there are a number of pros and cons. The benefits of share secured loans may outweigh the drawbacks in your personal situation, but it’s important to consider all the facts:
Pros of a share secured loan
- Potentially lower interest rate than other loan offers
- Easier acceptance with a lower credit score
- Great way to improve your credit
Cons of a share secured loan
- Potential loss of money from your savings account
- Fees or other associated costs may be added on
How to get a share secured loan?
The process of receiving a share secured loan is slightly different than that of, for example, a share secured loan vs. signature loan. Here is the overall process:
- Start by saving money: To even get considered for a share secured loan, you will need to prove you have enough money saved in the loan amount within your savings account
- Determine the amount you need: In congruence with step one, you should also add up the total amount you will need for the loan so that you know how much to save
- Find a lender and compare rates: Explore different offerings and see if there are any pre-qualifications that you qualify for.
- Deposit or open the account required by the lender: Certain lenders may require the funds to be in different types of accounts, so inquire with lenders as to which they prefer
- Funds are frozen and repayments begin: Once approved, your funds will be frozen and you can use the loan for whatever you need while starting your repayments
Things to consider before applying for a share secured loan
The biggest thing to consider when applying for a share secured loan is that, in the event of default, you stand to lose a good chunk of your savings depending on the loan amount. Additionally, defaulting on a loan has serious financial repercussions and can affect your credit score for years to come. Always be sure you can repay a loan on time and in full before applying for that loan.
Alternatives to share secured loans
Should you determine a share secured loan isn’t right for you, rest assured knowing there are many alternatives to consider. You are not simply limited to a share secured credit building loan, and some of the following can be quite helpful as well:
1. Credit builder loan
A credit builder loan works similarly to a share secured loan, with the difference being that you pay off the loan entirely before receiving the funds. Only once the loan is paid off do you have the loan sum deposited to your account for use. Due to this, it’s best used for long-term needs and for those simply wanting to improve their credit score and history.
2. Secured personal loan
A secured personal loan works the exact same way as a share secured loan except a different form of collateral is used. Therefore, this is best for those who may be skittish about using their savings account funds as collateral.
3. Secured credit card
A secured credit card works the exact same way as an unsecured credit card, but a cash deposit is required prior to using the secured card. Once that cash deposit has been made, it is held as collateral while you use the card like normal. In the event you don’t pay back the credit amount, it will be drawn from the amount you deposited.
FAQs
No, a share secured loan and savings secured loan are the exact same thing. In some cases, a lender may call it a savings secured loan because that is the type of collateral they use, whereas others may use a CD account or money market account.
A stock secured loan allows you to borrow money while using the value of your stock portfolio as collateral.
Yes, assuming your payments are made on-time and in-full on a monthly basis as requested, a share secured loan will quickly help your credit.
The funds frozen as collateral by a lender during the course of a share secured loans life will be available to you for use once the loan has been completely paid off, including any interest and fees.
As an example, someone with substandard credit seeking funds for medical expenses, may turn to a lender for a share secured loan. They will then use the funds provided to cover their medical bills and begin to repay the amount borrowed.