What Is a Share Secured Loan & How Does It Work?
Learn about share secured loans: a financial tool that lets you borrow using your own assets while potentially building credit.
A share secured loan allows individuals to borrow money by using their own savings or investment accounts as collateral. This type of secured loan pledges an asset to the lender, reducing their risk. Unlike unsecured loans, share secured loans directly link borrowed funds to existing financial assets.
Core Concepts of Share Secured Loans
A share secured loan uses your own money, held within a financial institution, as security. These “shares” typically refer to funds in savings accounts, certificates of deposit (CDs), money market accounts, or credit union share accounts. The collateral is usually held by the same financial institution that extends the loan, which streamlines the process.
These loans enable individuals to access liquidity without liquidating existing savings or investments. For instance, a share secured loan allows you to borrow against a CD’s value without incurring early withdrawal penalties. This approach helps maintain the integrity of your savings while providing necessary funds.
Operational Aspects of Share Secured Loans
When a share secured loan is approved, the collateral funds are “frozen” by the lender. This means the borrower cannot access or withdraw those funds until the loan is repaid. For example, if you secure a $5,000 loan with your savings account, that $5,000 portion becomes inaccessible during the loan term.
Interest rates on share secured loans are lower than unsecured loans because collateral significantly reduces lender risk. Rates might be a few percentage points above the interest rate the secured account earns, making them an affordable borrowing option. Repayment terms vary, but loans often have fixed monthly payments over durations from a few months to several years, sometimes up to 10 years.
The loan amount is generally 80% to 100% of the secured asset’s value. In the event of default, the lender accesses the frozen collateral to cover the outstanding balance. This direct access minimizes the lender’s loss and is why these loans are considered less risky.
Key Considerations
Timely payments on a share secured loan can build or improve a borrower’s credit score. Each on-time payment is reported to credit bureaus, demonstrating responsible financial behavior. This is beneficial for individuals with limited or developing credit histories.
The assets used as collateral remain inaccessible throughout the loan term. These funds cannot be withdrawn or used for other purposes, temporarily reducing the borrower’s liquidity. While secured funds may continue to earn interest or dividends, consider the opportunity cost of not being able to freely use or invest them elsewhere.
Share secured loans are primarily offered by financial institutions like credit unions and some banks. They are frequently utilized for purposes like debt consolidation, unexpected expenses, or establishing credit history, especially for those who might not qualify for traditional unsecured loans.
Applying for a Share Secured Loan
To obtain a share secured loan, contact a financial institution offering this product. Borrowers provide standard identification and basic financial information. The application identifies the specific savings or investment accounts serving as collateral.
After submission, the financial institution reviews the application, often with quick approval times given the secured nature of the loan. Upon approval, collateral funds are frozen in the designated account, and the loan amount is disbursed. The borrower then makes regular payments until the loan is fully repaid.