How to rebuild credit with a cash secured loan

Learn how you can build up your savings and repair your credit with a cash secured loan. 


Young couple reviewing their financial options online

If you’re looking for a customized loan that will help you build up your credit, you could benefit from a cash secured loan. These loans don’t actually let you borrow money to spend outright, but they let you deposit any cash you pay back into savings.

Payments will be withdrawn from your account on a set schedule, just like any other loan. Your lender will also report every payment you make to the credit bureau, which will help to improve your credit score much faster.

What is a cash secured loan?

A cash secured loan works a bit differently from a traditional loan. When you sign up for this type of loan, you won’t actually get any money to spend up-front. Instead, it works a bit like a savings account. Your lender will withdraw payments from your bank account each month, but instead of using these to pay off the money you borrow, it will deposit them into a secured account (like a short-term Guaranteed Investment Certificate).

How do cash secured loans work towards rebuilding credit?

Your lender will typically report all of your payments to the credit bureau as soon as you make them. This will add points to your credit score and help you build it up to an acceptable level. Once your loan is paid in full, you’ll be able to access the cash that your lender put into your secured account on your behalf to re-invest or spend on whatever you want. This feature of cash secured loans can be especially beneficial for people who have difficulty saving money on their own.

How much will I pay for a cash secured loan?

You’ll often need to pay over 20% APR on cash secured loans, even though you won’t get access to your funds until your loan is paid off. This could cost you hundreds or even thousands of dollars over time, depending on how much you borrow and how long you take to pay back your loan.

You may also have to pay additional set-up or administrative fees to get your loan up and running. These fees will usually vary by provider, so you’ll need to check with your lender to find out if you’ll have to pay anything extra on top of your loan.

How can I rebuild my credit with a cash secured loan?

The main draw of a cash secured loan is that it will help you rebuild your credit automatically. This means you don’t need to do anything other than make on-time payments to get started. Once you make your payments, you’ll just need to make sure your lender is reporting them to the credit bureau immediately for best results.

Once your loan is paid off, you can also rebuild your credit by using the money you’ve saved to pay off outstanding debts. For example, you could pay off your credit cards or put a lump sum onto your car loan. You could also use your savings as collateral so that you can qualify for a secured credit card if you want to diversify your credit to help improve your score.

Why do I need to build my credit?

Good credit is an important way to show lenders, employers and landlords that you’re responsible and trustworthy. Lenders and credit card companies might use your credit score to determine how much they want to lend you and at what interest rates. This score can also be a factor in whether you get approved or denied when you apply for a new job or a place to rent.

The most difficult part of having a low credit score is that you will likely struggle to qualify for financing. This could be problematic if you want to move ahead in life. For example, you probably won’t be able to afford a new vehicle or mortgage without a loan. You might also struggle if you can’t qualify for extra cash to pay for emergency expenses that come up unexpectedly (like car repairs).

What are the benefits of taking out a cash secured loan?

You’ll benefit in a number of ways from taking out a cash secured loan:

  • Build your credit. All of your on-time payments will be reported to the credit bureau, so your credit should start to improve as you pay down your loan.
  • Add to your savings. You’ll be forced to save money because you won’t have access to your loan amount until you pay off your outstanding balance.
  • Open new financing options. You could use your savings as collateral to take out a secured credit card.
  • Diversify your credit. You’ll get an extra boost to your credit score if this is the only loan you have outstanding (but you have other forms of credit).
  • No collateral required. You won’t have to put any assets like your house or vehicle on the line to secure your payments.
  • Bad credit doesn’t matter. You’ll likely be able to get approved for this type of loan even if you have no credit history or a low score.

What should I watch out for?

While cash secured loans can help you rebuild your credit, they also have a couple of drawbacks you should be aware of before you sign up.

  • High interest rates. You may have to pay up to 45% APR on this type of loan, which can add up to hundreds or even thousands of dollars to your loan.
  • Extra fees. You could end up paying additional fees like set-up or administrative fees out-of-pocket before you even start saving.
  • Funds are locked away. You won’t get access to your loan until you pay it off, which isn’t ideal if you have emergency expenses.
  • Not guaranteed to improve your score. Your payments might not bring your credit score up significantly, especially if you default on other debts.
  • Low borrowing amounts. Most lenders will only lend you a small amount for these types of loans, especially if your credit score is low.

What other ways can I rebuild my credit?

If you don’t want to take out a cash secured loan but you’d still like to rebuild your credit, you can try some of the following solutions:

  • Make your payments on time. The best way to improve your credit score is to make all of your bill payments on time, even if you can only afford the minimum payment.
  • Reduce your existing debt. You should try to pay off your existing debts as quickly as possible so that you can start putting more cash into savings.
  • Get a secured credit card. You can put up cash as collateral to lock in a prepaid balance on a secured credit card so that you can make payments on that.
  • Avoid closing old accounts. You should avoid closing credit cards that you have a solid payment history on as this will bring your score down.
  • Mix up your credit types. Build up your score by mixing and matching various types of credit (including loans, lines of credit, credit cards and more).
  • Review your credit report. It makes sense to check your credit report for errors at least once a year to make sure you’re not being penalized for incorrect data.
  • Access credit counselling. You could benefit from speaking with a credit counselling service about how you can build up your credit score without the need for another loan.

Bottom line

Cash secured loans can be a useful tool to help you rebuild your credit since all of your payments are reported to the credit bureau. You’ll also be able to access the money you save once your loan is paid off. These loans can be a good option for people who have difficulty saving money on their own or who want to rebuild their credit quickly. While these loans can be a good solution in the short term, they’re not the best idea if you have tons of debt already. If this is the case, you should focus on paying down your existing debt to build up your credit score.

Frequently asked questions

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