What Is a Share Secured Loan From a Credit Union?

A share secured loan leverages a borrower’s own savings as security, providing a pathway to access funds while potentially establishing or enhancing credit history. Understanding its mechanics and the unique benefits offered by credit unions can help individuals make informed financial decisions.

Understanding Share Secured Loans

A share secured loan is a type of secured loan where the borrower uses their personal savings as collateral. The funds held in a savings account, often referred to as a “share account” at a credit union, are pledged to secure the loan. The savings used as collateral remain in the borrower’s account, but a “hold” or “freeze” is placed on that specific amount for the duration of the loan. This restriction prevents the borrower from withdrawing the collateralized funds until the loan is repaid. Despite the hold, the funds typically continue to earn dividends or interest, allowing the borrower to benefit from their savings while simultaneously repaying the loan.

How Share Secured Loans Operate

The loan amount is typically determined by the amount of collateral available. Many credit unions allow borrowers to secure a loan for up to 100% of the funds in their pledged share account. Once approved, the specific amount of savings is placed on hold, serving as security for the loan. Interest rates for share secured loans are generally lower than those for unsecured loans, reflecting the reduced risk for the lender due to the collateral, and for example, rates might be structured as the current savings rate plus a small percentage, such as 2.00% to 4.25% APR, or range from approximately 3.10% to 6.75% APR depending on the term. As the borrower makes regular payments, the principal portion of each payment gradually releases the corresponding amount of the frozen funds, making them accessible again.

Advantages of Share Secured Loans

Share secured loans offer several benefits. One advantage is the opportunity to build or rebuild credit history. Consistent, on-time payments are reported to credit bureaus, positively contributing to the borrower’s credit score. This makes them accessible for first-time borrowers or those with limited or poor credit scores who might face challenges qualifying for traditional unsecured loans.

These loans feature lower interest rates compared to unsecured alternatives, leading to reduced borrowing costs over the loan term. A share secured loan also allows individuals to obtain funds without depleting their savings account. The collateralized funds remain in the account, potentially continuing to earn dividends.

Credit Union Specifics for Share Secured Loans

Share secured loans are closely linked with credit unions due to their unique structure and operating principles. At a credit union, the savings account used as collateral is often referred to as a “share account,” which signifies the individual’s membership and part-ownership in the institution. Establishing membership typically involves a modest initial deposit, often ranging from $5 to $25, into this account.

Credit unions are member-owned, not-for-profit financial cooperatives. Their earnings are typically reinvested or returned to members through reduced fees, lower loan rates, and higher deposit rates. This cooperative structure directly influences the terms and accessibility of share secured loans, often making them more favorable than similar products from other financial institutions.