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A Complete Guide To Share-Secured Loans

Victoria Araj5-minute read
PUBLISHED: February 23, 2024


When you think of ways to improve your credit, taking out a loan may not come to mind. Qualifying for a loan with decent terms usually requires a strong credit score. Fortunately, if you have a savings account, a share-secured loan may help you with both.

Share-secured loans can get you the funding you need without a credit check, as long as you have enough in your savings to secure the loan. All the while, you can boost your credit score as you pay off the loan.

Let’s take a look at how share-secured loans work, some of their possible perks, their downfalls and how you can get one if this seems like a good fit for your situation. We’ll also explore some alternatives to consider as you decide whether a share-secured loan is right for you.

What Is A Share-Secured Loan?

A share-secured loan, or a savings-secured loan, is a personal loan you secure with money in a savings account. You may also be able to use a certificate of deposit or money market account funds as collateral. In the event of a loan default, the lender can keep the money put up as collateral. But since it’s secured, it tends to come with low interest rates.

Some lenders limit the amount you can take out to a certain percentage of your account balance. Others may let you take out a loan equal to your entire balance. Either way, the amount you take out becomes frozen in your account. The frozen funds continue to earn interest at the rate they normally would.

When you regain access to your frozen funds differs by financial institution. Your funds may become available in parts as you repay the loan. But some lenders hold all your money until you repay the entire loan amount. Repayment is often broken into monthly payments over a set period of time. You can check with different lenders to learn about their loan term offers.

Share-Secured Loan Pros And Cons

When you take out any type of loan, considering its potential benefits and drawbacks is vital. Let’s dig into a few common advantages and disadvantages of share-secured loans.

Share-Secured Loan Pros

Share-Secured Loan Cons

Funds used as collateral still earn interest

Funds used as collateral are temporarily inaccessible

Can have lower interest rates since loan is secured

Risk of losing funds used to secure the loan if you default on the loan

Can be easier to get approval and funding

May come with additional fees

Borrowers have the opportunity to build credit by making on-time payments

Risk of negative credit impact in the event of missed payments or loan default

Share-Secured Loan Pros

Here’s a breakdown of some reasons using a share-secured loan can be favorable.

  • Funds used as collateral still earn interest. Money used as collateral from an interest-bearing account usually continues to yield returns.
  • They can have lower interest rates. As with many secured loans, share-secured loan rates tend to be lower.
  • Getting approval and funding can be easier. Some share-secured loans don’t require credit checks, so the approval process may be quick. And fast approval can also come with quick access to funding.
  • Borrowers have an opportunity to build credit. Making on-time payments can help improve your credit score. This can make getting approved for other types of funding, such as credit cards, easier.

Share-Secured Loan Cons

Here’s a breakdown of some factors to consider before you take out a share-secured loan.

  • Funds used as collateral are temporarily inaccessible. Lenders freeze money used to secure the loan. You can’t withdraw it until you start to, or in some cases fully, repay the loan.
  • You may risk losing the funds used to secure the loan if you default on the loan. If you can’t pay off the loan, your lender can keep the funds you used as collateral.
  • The loan may come with additional fees. As with many loans, share-secured loans may come with extra costs such as origination or late fees.
  • Missed loan payments or a default can negatively impact your credit. If you fall behind on repaying your loan or stop paying it back all together, your credit score can take a major hit.

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Who Should Use Share-Secured Loans?

As mentioned before, share-secured loans don’t always require credit checks. This may be appealing if a weak or limited credit history limits your access to other loans.

Plus, if you repay the loan on time, you can build credit. You can set up auto payments or direct deposit to ensure you don’t miss a payment. A strong payment history can help you get approved for loans with ideal terms down the road.

How To Get A Share-Secured Loan

If you think a share-secured loan is a good option once you weigh the pros and cons, you can follow these steps to get one.

1. Research Lenders And Their Requirements

Before you apply for a share-secured loan, explore your lender options. Many banks, credit unions and online lenders offer these loans, so shop around to find the best terms. Pay attention to interest rates, repayment periods and any additional fees they charge.

Also be sure to check their eligibility requirements. Regardless of lender-specific requirements, you need enough money in your account to secure the loan.

2. Apply For The Loan

Once you choose a lender, submit a loan application. Whether you can do this online, over the phone or in person depends on who you get the loan from. Lenders may ask for personal information like your employment status and Social Security number. You’ll likely need to provide your desired loan amount and term length as well.

After you gather the needed information, you can submit your application.

3. Receive Your Approval Decision

The approval process tends to be quicker since you’re technically getting a loan against your own money. Depending on your lender, you could hear back instantly. If you’re not approved for the loan, be sure to check that the account you intended to use as collateral has sufficient funds.

4. Get Funds

If the lender approves your application, your final step is to wait to receive your funds. How long this will take varies based on your lender. As soon as you get the money, you’re free to use it. You’ll likely enter repayment shortly after fund dispersal.

Share-Secured Loan Alternatives

Here’s a few other funding options to consider as you determine whether a share-secured loan is suitable for you.

Credit-Builder Loan

While you may be able to get a share-secured loan with poor credit, you also risk sacrificing your savings. Luckily, other loan options are available if your credit limits your access to funding.

For one, you could use a credit-builder loan. Instead of receiving funds and then repaying them, your lender deposits the money into your account and freezes them. Once you pay off the loan, you gain access to your funds. This can be a good option if you want to build credit and don’t need immediate funding.

Secured Personal Loan

You could also consider getting a secured personal loan. These loans usually come with less strict credit requirements. You can secure the loan with assets like your house or car. But again, you could lose that asset if you don’t pay off the loan.

Unsecured Personal Loan

If you’re less concerned about weak credit hurting your chances of loan approval, you could look at getting an unsecured personal loan. If you qualify for this type of loan, you won’t need to secure it with collateral. But since lenders don’t have an asset to tap if you default on an unsecured loan, you may need a stronger credit history to get approved.

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Final Thoughts

A share-secured loan can be helpful if you need quick access to money without draining your savings or want to build credit. Just make sure you have enough in your savings to secure the loan amount you’re seeking.

If you’re interested in finding out whether you prequalify for an unsecured personal loan, start an application with Rocket LoansSM today to see what rates and terms we have to offer.

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.