If you are in the market for a personal loan, a deposit secured loan could be a great option. It’s convenient and may offer more favorable terms, depending on your needs. As always, it’s important to know what you’re signing up for and what it entails.
What are deposit secured loans?
Deposit secured loans use a savings account or a certificate of deposit as collateral instead of a house or property. They allow you to borrow against the amount without withdrawing any funds. Your savings account or CD will continue to earn interest while you pay off your loan.
How do they work?
When you apply for a loan, a hold will be placed on the amount you’re borrowing. There are minimum and maximum limits that you can borrow against. As you make monthly payments, the holds are released on the savings funds equal to the principal of each monthly payment. As you pay off your loan, you will slowly gain back access to the savings that were used as collateral.
What are some advantages to deposit secured loans?
Deposit secured loans are less expensive than traditional loans mainly because interest rates can be only slightly higher than the interest rate on your savings account or certificate rate. Since your account is earning interest throughout the life of your loan, including the frozen funds, the loan itself ends up costing you less.
The terms of the loan itself are flexible and can be adjusted to what works best for you. Because there is minimal risk to a deposit secured loan, approval can be easier while the interest rate is lower. This could be an advantage to borrowers with damaged credit who might not otherwise qualify for a loan.
Deposit secured loans can improve or build your credit score. This is especially helpful if you’re looking to start or improve your credit rating. For example, you can use the money from your secured loan to pay off other loans with higher interest rates.
Are there any disadvantages to a deposit secured loan?
There is an increased risk to the borrower since your own money is used as collateral. If you can’t repay the loan, your savings funds will be used to pay off the loan. Also, liquidating a savings account might be less expensive than borrowing against it since borrowing always comes with interest.
For more information on deposit secured loans, talk to one of our banking experts at 570-752-3671.
