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.