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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 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.
In the best-case scenario, an application for a bad credit personal loan can be made within minutes and then be approved within 24 hours.
Some lenders are able to approve applications over the internet and within minutes. However, there is a catch. People who take out easy/instant loans generally pay higher interest rates and are restricted to lower amounts than people who follow a traditional borrowing process.
A bad credit personal loan is ‘secured’ when the borrower offers up an asset (such as a car or jewellery) as collateral or security. The lender can then seize the asset if the borrower fails to repay the loan.
While some personal loans can be secured by the value of an asset, such as a car or equity in a property, student personal loans are often unsecured, with higher interest rates.
Some lenders also offer guarantor personal loans to students. These loans have lower interest rates, as a guarantor (usually a relative of the borrower with good credit) will guarantee the loan, taking on the financial responsibility if the borrower defaults.
Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application.
It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit, because there’s a higher likelihood that the personal loan will be repaid.
So a borrower with good credit is more likely to have a loan approved and to get that approval faster, while a borrower with bad credit is less likely to have a loan approved and to get that approval slower.
It’s unusual for a lender to make a personal loan above $100,000, although there is no formal limit. As with all lending products, each lender sets its own policies, while each borrower is assessed on a case-by-case basis.
The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:
- The big four banks (ANZ, Commonwealth Bank, NAB and Westpac)
- Smaller banks (such as Bank of Queensland, Bendigo Bank and MyState)
- Mutual banks (such as Heritage Bank, Greater Bank and Newcastle Permanent)
- Credit unions (such as People’s Choice Credit Union, BCU and Community First Credit Union)
- Non-bank lenders (such as Pepper Money, Liberty and RACV)
- Peer-to-peer marketplaces (such as Harmoney, SocietyOne and RateSetter)
There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.
Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans – they also get loaned less money. Each lender has its own policies, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.
It may be much more difficult for a self-employed borrower to successfully apply for a personal loan if they also have bad credit. Many lenders already consider self-employed borrowers to be riskier than those in full time employment, so several self-employed personal loans require borrowers to have excellent credit.
If you’re a self-employed borrower with a bad credit history, there may still be personal loan options available to you, such as securing your personal loan against a vehicle of equity in a property, though your interest rates may be higher than those of other borrowers. Consider contacting a lender before applying to discuss your options.