If you need to improve your credit while protecting your savings, a cash loan can help you achieve your goals. The concept sounds weird at first: Borrow your bank savings – and pay more on loan interest than you earn on savings. But there are benefits to using your money to secure a loan. These loans are especially useful for building strong credit, and can also help you manage your behavior.
What is a guaranteed loan?
A secured loan is a loan that you guarantee by depositing funds with your lender. You “qualify” for a loan primarily based on the lender’s ability to take cash if it ceases to make payments on the loan.
To use this type of loan, you will borrow from the same bank or credit union where you have money in a savings account, money account or deposit certificate.
Since you already have money in your account, there is minimal risk to the lender. You have delayed this money as collateral, which means that the lender can take over the funds if you do not pay the loan as agreed. As a result, it is easier to get approved. If you cannot qualify for other types of loans (such as unsecured loans or credit cards), cash backed loans may be a good idea.
How they work?
Use for All: Loans Secured loans can be used for any legal purpose.
But it is best to put money toward something that you really need or will bring in a return on your investment (such as improvements to your home). The loan can come in the form of a lump sum, or you can use a credit line (for example, a credit card with cash).
Competitive Rates: You pay interest even though your lender already has the cash to guarantee the loan.
However, the interest you pay on a secured money loan is lower than what you will pay for most other loans. Unless you have a high credit score, you will get a better rate with these loans than with credit cards or personal unrecorded loans. Again, the risk to your lender is low, so the cost to you is less.
Fixed Interest Rates: The lowest rate is usually fixed on the loans you take on a lump sum, so your payment stays the same over time. You do not take the same risk that comes with a variable rate, such as an increase in surprise payments. Especially if the prices are low, getting a fixed rate for several years can work in your favor if your savings start to earn more. If you use a credit card with cash, the rate will be variable.
How much? Some banks have allowed you to borrow the full amount you have deposited and pledged as collateral. Others limit the loan-to-value ratio to about 90% (or less). For example, for every $ 100 in your account, they can only let you borrow $ 90. If your primary goal is to build a loan, you don’t need a big loan – a few thousand dollars is enough, and it’s usually to start with loans that are smaller of that. Some banks offer $ 100,000 in loans – the maximum depends on your bank or credit union.
Short Term: Most cash loans come with relatively short deadlines. Ten years or less is common. These loans are best for helping you through difficult times and improving your credit scores. If you are looking for a 30-year mortgage, a secured loan is probably not the right tool.
Payment on installments: T the repayment of lump sum loans, you will usually make equal monthly payments over the life of your loan. Part of each payment is reduced by your loan and the rest is interest expense. To see how this process works, read about depreciation. Look at some numbers for yourself and plan your loan.
However, there are variations on the standard loan. Some loans are available in the form of secured credit cards or other types of credit lines.
Relatively small: You don’t have to go big to redeem these credits.
If you’re just starting to build (or renew) a loan, ask for a few hundred dollars to borrow. A smaller loan will be less burdensome with your finances. You don’t want to lock in more money than you have to, and you can keep interest rates low.
Why not spend your money?
You may be wondering if it makes any sense to get a loan when you already have cash available. In some cases, spending cash is a good option: You avoid paying interest, keeping the debt burden, and risking no damage to your credit if you stop making payments.
However, using these loans can be helpful.
Build Credit: If you have poor credit (or have never borrowed in the past so your credit is “thin”), these loans may be a step toward higher credit scores. Each time you successfully disburse a loan, your credit improves (assuming credit is reported to credit reporting agencies).
Offset interest costs: If you are going to pay interest to build a loan, it is useful to offset some of these costs. Of course, you should only borrow and pay interest if you have other benefits. When you use your money as collateral, the money is locked until the loan is repaid (you may be able to access one of them after partially paying off the loan). In the meantime, your money keeps earning money, but you will earn less interest than you pay on a loan.
Don’t Save Your Savings: There is also a behavioral benefit. If you have a hard time saving money, it may not be a good idea to ruin your emergency savings (because then you will need discipline to rebuild and have to start from scratch). Borrowing against your money gives you a structure that encourages you to make the necessary payments and discourages you from using credit cards to pay for emergencies. When the loan is paid off, you will still have a sum of cash for future needs.
Better loans in the future: Lastly, the difference between what you earn and what you pay is the price of enhanced credit and psychological benefit. If you use larger loans in the future (such as buying a house or a car), the strategy may be worth it. If you have better credit and more money available to make big payments (because you kept your savings down), you can qualify for a better rate on those big loans. This rate can lead to a much lower cost of interest for life.