What Is a Share Loan and How Does It Work?

A share loan is a type of secured financing that uses assets already owned by the borrower and held within the lending institution as collateral. This financial instrument allows individuals to access funds without liquidating savings or investments. The pledged funds remain within the borrower’s account during the loan’s duration.

Defining a Share Loan

A share loan, termed a share-secured or savings-secured loan, is a financial product where the borrower pledges funds held in their savings account, certificate of deposit (CD), or other investment accounts at the lending institution as collateral. The term “share” originates from the concept of members holding “shares” in a credit union, referring to their deposited funds.

The money designated as collateral remains in the borrower’s account, continuing to accrue interest or dividends throughout the loan term. However, the lending institution places a “hold” or “freeze” on these funds, making them inaccessible for withdrawal until the loan balance is satisfied. This arrangement differentiates a share loan from an unsecured loan, where no assets are pledged as security. Unsecured loans carry higher risk for lenders, resulting in higher interest rates for borrowers.

Share loans are predominantly offered by credit unions, reflecting their member-owned cooperative structure where deposited funds are akin to shares. Some banks and brokerage firms also provide similar secured lending options, though they may categorize them differently, such as securities-backed loans or lines of credit.

Operational Mechanics

Due to the minimal risk for the lending institution, interest rates on share loans are lower compared to those for unsecured loans. These rates are often structured as a small percentage above the interest or dividend rate that the collateralized funds are already earning, such as 2% above the current savings rate.

Loan terms and repayment schedules for share loans are flexible, with fixed monthly payments over durations that can range from a few months to several years, sometimes extending up to 10 years. The loan amount ranges from 90% to 100% of the value of the pledged collateral. For instance, if a borrower pledges $5,000, they might be eligible to borrow between $4,500 and $5,000.

During the loan’s active period, the designated collateral funds are held or earmarked in the borrower’s account. These funds are not transferred to the lender but remain in the account, continuing to earn interest or dividends for the borrower. As the principal balance of the loan is repaid, the corresponding portion of the frozen funds may become gradually available.

The application process for a share loan is generally straightforward and often results in quick approval. This is largely because the loan is fully secured by the borrower’s own assets, which mitigates much of the credit risk for the lender. In the event a borrower fails to repay the loan, the lending institution has the right to access the pledged collateral. This allows the lender to recover the outstanding balance directly from the frozen funds.

Types of Share-Based Collateral

The assets considered “shares” for collateral purposes in a share loan vary depending on the financial institution. For credit unions, the most common forms of collateral are funds held in traditional savings accounts, often called “share savings accounts.” These accounts represent the borrower’s membership in the credit union.

Certificates of Deposit (CDs) and money market accounts held at the credit union are also accepted as collateral for share loans. The value of these deposited funds determines the maximum loan amount. The structured nature of CDs, with their fixed terms and interest rates, makes them a stable form of collateral.

Beyond traditional credit union deposits, investment shares like publicly traded stocks, mutual fund shares, and exchange-traded funds (ETFs) can serve as collateral through a bank or brokerage firm. These types of loans are often termed securities-backed loans or lines of credit. The fluctuating market value of these investment assets influences the loan-to-value ratio, and lenders may require additional collateral or partial repayment if the value of the pledged securities declines significantly.

While less common, some specialized lenders may accept unlisted stocks or other less liquid investment holdings as collateral. These arrangements are more complex, involving detailed assessments of the private company’s financial health and the marketability of its shares. The specific types of accounts and investment products accepted as collateral are determined by each lending institution’s policies.