Can Cash Secured Loans Help Rebuild Your Business Credit?

Business Ideas

Taking out a cash secured loan means that you are using your own savings as collateral for your debt. Since you still have to pay interest on cash secured loans, you are probably wondering why anyone would want to pay to borrow money with cash already in the bank. Well, cash secured loans are not for everybody but are great for building credit.

How Do Cash Secured Loans Work?

Computer User Presses Business Loan Orange Button on Modern Keyboard with Business Loan Key. Once you have deposited money into your account, you simply apply for a loan against the balance. Depending on your choice of bank, cash secured loans may be available as credit cards, lines of credit, or lump-sum loans. You can obtain cash secured loans at a local branch bank, and you can also find many offers for cash loans online.

It is not possible for you to withdraw the cash securing the loan and you cannot use it for making your loan payments. However, you still continue earning your normal interest on the sum deposited.

Collateral

Cash-secured loans are usually tied to savings accounts or certificates of deposit as a form of collateral. You need to get the loan from the same bank holding your Certificate of Deposit or savings to help the bank put a freeze on the account. The freeze ensures that you don’t access the funds in the account until you finish paying off the loan. The cash-secured loan amount can never be more than the balance held in your account. During the loan term, you continue earning interest on the savings and this helps in offsetting the interest you pay for the loan.

Interest Rates

Banks usually borrow money from either the Federal Reserve or each other and use the cash for funding loans. Banks then pay interest on the borrowed funds and before they lend the money out to customers, they mark up the interest rate. The customers with the highest level of credit worthiness pay what is referred to as the prime rate. The interest rate is normally set at 3 percent above what the bank paid when borrowing the money.

Cash-secured loans however work a bit differently considering that banks are simply lending you money that’s already yours. The bank is exposed to no risk since it can always cash in the account if you ever fail to repay the loan. Less risk translates to lower interest rates and it is why cash-secured loans are regularly priced lower than the prime rate.

Benefits

If you are looking to rebuild your credit, you may have problems getting conventional loans or unsecured credit cards. Banks do not usually conduct credit checks before they issue secured loans since they involve no risk. However, banks report payments on cash-secured loans to credit bureaus meaning that they are an invaluable tool for boosting credit scores. In addition, with these loans, you get the money you require without wiping out your bank account.

Considerations

Banks don’t usually make a lot of money on cash-secured loans because of the low interest rates. For this reason, loan terms are typically limited to 5 or 10 years. A shorter loan term means higher payments and some banks don’t allow you to pay off your loan using the cash for securing it. If your bank permits you to do this, you may need to pay an early withdrawal penalty because of cashing in the Certificate of Deposit before the end of the term.

Final Thoughts

Cash-deposit loans are particularly good for those businesses looking to rebuild their credit. If you didn’t know about cash-deposit loans, the information provided in this article should offer a great introduction. If you would like to rebuild your credit, consider taking out a cash deposit loan.

Rodney Berry
Rodney Berry
Previous
Where Is Java Programming Used In Real Life?
Next
Concealed Carry Weapons (CCW) Permits are On the Rise among Small Business Owners

Categories

Free Email Series

Popular Posts

Free On-Demand Webinar: The Entrepreneur's Guide to Overcoming Fear and Getting Started

Join our Side Hustle expert Kim Perell as she teaches you how to flip fear on its head and find new meaning in the word through her four-step process. [...]

How This Company Utilizes Real-Time Interaction Intelligence to Help Dealmakers and Negotiators

The co-founder and CEO of Substrata shares how his company analyzes subtext and nonverbal communication using AI. [...]

5 Dirty Secrets About Online Business Today

Everything you think you know about making money online is probably wrong. [...]

Why Investors Should Look at Vietnam's Renewable Energy Industry

Vietnam's status as a regional hub and stronghold for renewable energy is rapidly growing. [...]

10 Things to Check Before Launching a Website

Here are some critical pre-flight steps, from proofreading to validating code to adding sitemaps. [...]

Regaining Control of Your Sleep Life...From a (Recovering) Insomniac Entrepreneur

I never had trouble leaving things at the office -- until I started building my own business.  [...]

How Customer Discovery Can Significantly Enhance Your Product-Market Fit

Successful companies understand that having a great idea isn't enough to convince consumers to give them money for their product. [...]

Revisiting the Perks and Perils of Entrepreneurship Amid the Pandemic

Amid the Great Resignation, many Americans are turning to entrepreneurship, but aspiring small business owners must boldly rise to insurmountable challenges to make an impact and to establish a legacy that is bigger than any one individual. [...]

Jim Belushi Reveals the Hardest Thing He's Ever Done

The actor-turned-entrepreneur, who stars in the second season of his reality series Growing Belushi, says the Green Rush has been more like a crawl, but it's well worth it. [...]

Military Veterans Make Great Entrepreneurs, But Startups Aren't the Only Path to Success

Five things you'll never hear veteran entrepreneurs say, and how they're uniquely poised to take advantage of overlooked business opportunities. [...]

3 People You Need in Your Corner When Starting a Business

Starting a business is not easy, especially when you are on your own. [...]

How Feeling Excluded as a Child Drove this Entrepreneur to Start Her Own Company

Amanda Ealla's own childhood experiences of feeling like she didn't belong drove her to start ISH Dolls. Here are three lessons she's picked up on the journey of starting her own business. [...]

How This Clothing Designer Launched a Side Hustle Making Customizable Grazing Boards

The founder of ME'N'U Grazing LA shares her side hustle journey and her advice for anyone thinking about starting their own business. [...]

8 Practical Tips for Successfully Launching Your Startup

How to get your startup from ideation to execution. [...]

SM Camer. All Rights Reserved.