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?

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