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    Share-Secured Loan - All You Need To Know

    If you are looking to build your credit score, then a share-secured loan may be an excellent option. Paying debt consistently and on-time accounts for up to 35% of your credit score. If you have ever tried to get a credit card, rent a home, or lease a car, you know how crucial a good credit score is for accessing the best deal. 

    Share-secured loans are personal loans backed by a share account and operate quite differently than an unsecured personal loan. A share account is what credit unions usually refer to as savings accounts. This is not a type of loan designed to offer you a large sum of money quickly. Instead, it is intended to help you build credit over time. 

    Continue reading to learn how these loans work, what you need to get one, and the associated pros and cons.

    Read more:

    Secured Personal Loans vs Unsecured Personal Loans

    How does it work?

    If you are interested in this unique loan type, it is vital first to understand how it operates. This is not your typical loan, designed to get you cash quickly to pay off a substantial debt. On the contrary, the point of this loan is to allow you to demonstrate an ability to make on-time payments throughout a designated period. 

    This type of loan works by pledging funds in your share account as collateral for a personal loan. The lender freezes your share account when you take the loan, and leaves it until the loan is paid off. Normally, the borrower repays the loan in monthly installments.

    What Do You Need?

    So, what exactly do you need to get a share-secured loan? The requirements are actually pretty straightforward: 

    • You must have an existing share account. 
    • Your share account needs to have enough funds to back your loan. 
    • You should already be a member of the credit union.

    If you are considering getting a loan secured by a share account in the future, you can begin by ensuring you meet the basic eligibility requirements. If you do not match these criteria, you can work on saving up and joining a credit union. Once you do, you should be eligible for the loan. 

    Keep in mind, it is possible to get a share-secured loan with a family member whose account you share.

    Pros Versus Cons

    Like all loans, there are pros and cons attached to obtaining this type of loan. You should do your homework carefully, and make sure this is the right type of loan for you. Writing down your financial goals and talking them over with an expert is always an excellent first step. 

    Some cons of this loan type may include: 

    • This is not a type of loan to help you pay off an expense or a debt. This loan does not give you funds that you do not already have in your possession.
    • There can be serious consequences if you are unable to repay your loan. The credit union may seize the funds in your savings account, so beware.
    • Taking out a share-secured loan freezes your savings. The money will remain untouchable during the loan repayment period. Be sure to set aside some funds for a rainy day beforehand.

    There are also many benefits of share-secured loans, including:

    • You do not need a good credit history or even any credit history. 
    • A share-secured loan, in essence, protects your savings because you cannot access the money or spend it.
    • This type of loan can help you access better rates on future items like a car, renting a house, or even taking out a personal loan.
    • The low rates make this an attractive option. You typically pay only a little bit more than the interest the account is already generating. 
    • If building your credit is your primary goal, this is a relatively simple, safe, and secure way 

    Be sure to carefully review your specific financial situation before moving forward.

    How To Apply

    Applying for a share-secured loan is simple. Most likely, you can apply through your credit union’s website. If not, you should be able to apply in person at a local branch. Be sure to know what documents you need to bring or submit online so you arrive prepared for the process. 

    What If You Don't Have A Share Account?

    If you do not have a share account, then there are a few alternatives available. These include: 

    • CD loans that allow you to borrow up to 100% of your CD balance
    • Credit-builder loans that may have higher interest, but usually let you borrow between $500-$1500. 
    • A secured credit card 

    Explore other options or even consider asking a family member to go in with you on your share-secured loan. 

    Bottom Line

    A share-secured loan is not your average type of loan. Most people seek out loans to get access to a larger amount of money quickly. This loan operates in such a way that it allows you to build your credit safely and securely so you can gradually improve your credit report. Take the time to ensure this kind of loan is appropriate for your financial situation.