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Loans secured by deposit
What are loans secured by deposit?
Whenever you apply to take out a loan a lender will offer you a range of options depending on your financial circumstances and the amount of money you want to borrow. There are many ways a lender may have to offer you a secured loan, that is a lien over a property, car or other valuable item that ensures it gets its money back in the event of you defaulting on that loan. Another method is to offer loans secured by deposit, sometimes known as cash-secured loans, where your own savings are used as collateral for the loan.
In simple terms the loan is secured on savings accounts or certificates of deposits and you have to get a loan from the same bank where your cash savings are held. The bank then places a freeze on that account so you can't access it during the period of the loan until you pay it off. You'll still get interest paid on the amount frozen but you will also be paying interest on the loan secured by deposit. The interest you get, depending on how much it is, can help towards paying the loan interest, but you can't borrow more than the balance held in your savings account.
Why do people use loans secured by deposit?
Although it may not be for everybody, and if you don't have savings you won't be eligible for this type of loan, they are often used for people who want to build up their credit again. Credit rebuilding can take time and if you've had problems with credit rating in the past it could be more difficult to get a conventional loan or an unsecured credit card. Loans secured by deposit means your bank is effectively lending you your own money. It has no real risk because it can take the cash from your account if you fail to repay the loan. Such loans are reported to credit agencies and can help boost your credit score. They are also useful because you don't have to wipe out your savings to get the money you need.
What are the main features of loans secured by deposit?
You can benefit from a lower interest rate because the bank has a lower risk as it's your money that is being used as collateral and they can get back the loan amount if you default on it. You will probably be asked what you want the loan for but that's up to your bank, and you don't have to borrow right up to the limit of your savings if you don't need to.
What are the pros and cons of loans secured by deposit?
A lower interest is an attractive feature of this type of loan and it can be a helpful tool in rebuilding your credit score.
If you don't pay back the loan, no matter what the reason, you could lose part or all of your savings depending on the agreement you have in place with your bank.
Mark Bristow
Senior Financial Writer
Mark Bristow is a senior financial writer for RateCity and an experienced analyst, researcher, and producer. Working for over ten years, Mark previously wrote and researched commercial real estate at CoreLogic, and has seen articles published at Lifehacker and Business Insider, among others. Most recently, Mark has joined RateCity working across finance as a whole. Whatever the topic, Mark’s goal is always to provide simple solutions to complex problems.
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FAQs
It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. Some simple ways you can give your credit score a boost include closing extra credit cards, reducing your credit card limit, pay off any loans and make loan repayments on time.
As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.
Some lenders will consider personal loan applications from a borrower with bad credit if the borrower has a family member with good credit willing to guarantee the loan (a guarantor).
If the borrower fails to pay back their personal loan, it will be their guarantor’s responsibility to cover the repayments.
Personal loans may require a borrower to provide proof of identity, proof of residence, details of any other outstanding loans (including credit cards), details of assets they own (e.g. savings, car, property), and proof of income.
While borrowers in full-time or part-time employment can often provide payslips and similar documents to prove their income, self-employed borrowers may need to provide other documents, such as bank statements or tax returns, to demonstrate that their income can cover a loan’s repayments.
If you’re having trouble being approved for a loan of less than $2000 and urgently need to purchase household essentials, there may be emergency loan options available to you.
For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.
For further assistance, consider contacting a financial counsellor, or calling the National Debt Helpline on 1300 007 007
It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.
If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.
Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:
- Proof of identity
- Proof of residence
- Proof of income
- Details of assets (e.g. car, home)
- Details of liabilities (e.g. credit cards, other loans)
- Loan amount
- Loan term
Many borrowers use quick loans to cover short-term or urgent costs, such as paying for car repairs, medical bills, or replacing broken appliances or electronics. Quick loans often have high interest rates compared with regular personal loans.
Before applying for a quick loan, consider your other available options, such as working out a payment plan or applying for an advance or extension.
Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.
If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.
Depending on the lender, personal loans and medium-amount loans for $5000 can sometimes be approved in under an hour, and give you access to the money the same day. Other loans may take 24 hours or longer to assess your application, and you may not get the money for a few days.
If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.
Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.
Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.