Share Secured Loans: Build Credit and Gain Financial Freedom
One of the most frustrating parts of entering adulthood is credit. Credit requirements can sometimes form a huge obstacle to young adults without credit history looking to further their education or get their first apartment. Building up your credit score from poor credit is difficult enough, but how do you develop credit in the first place? A secured personal loan can be of use.
Share secured loans use your current funds as collateral for a loan. You can leverage your current wealth to make a big purchase while building credit and establishing a credit history that showcases your financial responsibility. This loan option is particularly attractive to young loan-seekers or those who are looking to build a positive credit and payment history. Lanco Federal Credit Union can help you attain a share secured loan to aide you in establishing credit.
How Do Share Secured Loans Work?
Secured loans are fairly traditional forms of money lending. A borrower provides a bank or credit union with collateral, such as a house or vehicle, as a way of promising that the loan will be repaid. Mortgages and auto loans are examples of this type of loan.
In a share secured loan, the collateral is the borrower’s savings. You are essentially borrowing your own money from your financial institution. Your institution will ‘freeze’ or ‘lock’ the agreed-upon amount while providing you with a loan. As the loan is paid off, your money is gradually freed again. Because your loan is secured with your own cash, this provides ample confidence that you can pay back the loan.
Why Should I Consider a Share Secured Loan?
You might think that a share secured loan sounds pointless. If you already have enough money in your bank account to cover a loan, why not just use your money? There are a few big reasons you might pursue a savings-secured personal loan:
Your Money is Locked in a Share Certificate
Share Certificates can be incredibly useful as they provide a secure place for your cash that can grow off of dividends. But these accounts come with the downside of no longer being liquid until the maturity date—or at least not as liquid as a checking account.
Your Credit Check Comes Back Low
Borrowers with good credit scores are more attractive to lenders because there is proof that the borrower is able to pay the loan back. Share secured loans allow you to build credit and seek larger loans with lower interest rates when needed.
You are a First-Time Borrower
Getting your credit started can be difficult. You might be cautious about starting a new credit card or the possibility of predatory loans. A share secured loan to build credit is very low-risk compared to unsecured loans with extremely high interest rates.
If your financial situation fits with any of these, you should strongly consider a share secured loan to access or build credit. This process can be fast and simple, done through your trusted institution. If you’re interested in a personal loan that can be leveraged into credit improvement, discuss it with your trusted credit union.
What Are the Pros and Cons of a Share secured Loan?
Though there are marked benefits to a share secured loan, let’s look at some of the pros and cons.
Pros
- Low-interest rates – because you put your savings up as collateral, the lender takes a minimal risk and typically charges a much lower interest rate.
- Quick approval – It is common to receive quick approval for this type of loan. Because you are basing the loan on money already stored with the lender, there is no need for slow credit checks.
- Build credit while building money – Even though your money will be essentially ‘frozen’ while you repay the loan, your savings can still build interest while you develop credit.
- You won’t deplete your savings – If you cover a large expense by paying from your savings, you might not have a plan for paying yourself back. Using a share secured loan instead helps to ensure your savings balance will be there in the future.
Cons
- You could lose your collateral – As with any loan, if you are unable to make loan payments, the lender is within their rights to take your collateral – which would be your savings in this loan format – to cover balances owed.
- Defaulting presents risk – Just as positive repayment history is reported to credit, so are negative marks. If you don’t make your payments on time or fall months behind your due date, you may owe late payment fees, and your credit score will take a hit.
- Loan amount may be limited – Because a share secured loan requires you to pledge savings, your loan maximum cannot be any higher than the amount of savings you offer. If you need more funds, you may need to consider additional financing options.
Taking on a personal loan will always present sizable risk. But sometimes you can’t avoid such dangers. A secured personal loan lets you take on much less risk than other loans. Don’t let caution prevent you from reaching your life goals. Speak with a knowledgeable lender who can walk you through the process and help you build credit.
How Do I Qualify?
Share secured loans are essentially borrowing your own money from your financial institution. You likely already qualify if you are a member of a credit union and have an appropriate amount of money saved up already.
It’s worth shopping around when seeking a credit-building loan like this. Some credit unions will offer a savings-secured loan with more terms and conditions attached or charge a higher rate than others. Discuss this option with your institution’s loan department.
Are There Alternatives to Share Secured Loans?
If you’re concerned about short-term financial health, there are several options available:
A secured credit card is similar to a share-secured loan and uses savings equal to the credit limit as collateral. These savings are placed on hold, which secures the line of credit. The borrower is responsible for making on-time payments, building a positive payment history.
Another option is a secured personal loan. These can be valuable if you have a sizable asset to place as collateral. Instead of money in your account, you use a personal asset such as a vehicle as collateral. These loans can provide access to capital you wouldn’t otherwise be eligible for.
Find Financial Freedom Through Lanco Federal Credit Union
Starting out with little to no credit is a struggle. The anxiety of getting approval and constant uncertainty of your finances can make you put your life on hold. But share-secured personal loans let you live a life without that fear. If you’re concerned about the monthly payments or eligibility requirements or want to ask about other personal loans, call us today and start the discussion of how we can help you achieve your goals.