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What is a share-secured loan?

Use your credit union savings to build your credit score at a low cost.

A share-secured loan is a personal loan backed by a share account, which is what credit unions typically call savings accounts. It’s meant to help you build your credit rather than cover a large expense. If you need more money than you currently have access to, look into other types of secured loans.

How do share-secured loans work?

A share-secured loan works by using funds in your share account as collateral for a personal loan. When you take out the loan, the lender freezes your share account until you pay off your balance — typically in monthly installments.

The main purpose of a share-secured loan is to build your credit by establishing a history of on-time repayments. This counts for 35% of your credit score — more than any other factor. You can also use it to access funds in your or a family member’s share account without cashing it out.

Banks often offer savings-secured loans, which work the same way.

How much can I borrow?

Usually you can borrow up to 100% of your share account balance.

How much does it cost?

Credit unions typically charge an interest rate that’s 1% to 3% more than the interest rate on the bank account.

So, if you have a share account with a 1% interest rate, you’d pay between 2% and 4% interest. But because you’re still earning dividends on your account, it’ll only cost you a total of between 1% and 3%.

What are the requirements?

Generally, you only need to meet two requirements to take out a share-secured loan:

  • Credit union member. You must already be a member of the credit union.
  • Share account. You must already have a share account with enough funds to back your loan — or a family member who does.

Some credit unions might have minimum share account balances, but many don’t. You also typically need to show that you have the regular income to cover repayments when you apply for any type of loan, including share-secured loans.

Is a share-secured loan the same as a share certificate loan?

No, a share-secured loan is slightly different than a share certificate loan. The main difference is that you can regularly access the funds in your share account before you take out the loan, and with a share certificate account — you can’t.

This is because share certificates are similar to bank CDs. The money you put into it earns higher dividends, but you’re unable to access the funds until the maturity date.

A share-secured loan is a good option to build credit while still having access to the share account funds before and after the loan, even if you pay it off early. If you’re looking to earn a higher rate on your savings and don’t mind them being locked in for a longer period, you might benefit more from a share certificate loan.

How can I can benefit from a share-secured loan?

You can benefit from a share-secured loan in the following ways:

  • Build your credit. A share-secured loan is designed to build your credit by establishing a history of on-time repayments.
  • No credit history required. Unlike an unsecured personal loan, a share-secured loan doesn’t require a lengthy credit history of previous loans, credit cards or other credit products.
  • Low rates. You’ll only pay slightly more than the interest the account already earns, making it an inexpensive way to build your credit — especially compared to credit-builder loans.
  • Save your savings. Using your savings as collateral allows you to keep your savings account full and earning dividends while also accessing the funds.
  • Access to family savings. Many credit unions allow you to use a family member’s share account as collateral for a loan or apply with a joint applicant or even cosigner.
  • Get better rates in the future. One benefit of having a higher credit score is that you’ll be able to qualify for better rates and terms on credit cards and loans.

What are the drawbacks?

Consider these potential drawbacks before taking out a share-secured loan:

  • You need a share account. This option isn’t available to you if you don’t already have a share account with a credit union.
  • Can’t help you cover an expense. share-secured loans won’t give you access to money you don’t already have.
  • Freezes savings. You won’t be able to touch the money in your savings account while you’re repaying the loan.
  • Risk losing savings. If you’re unable to pay your loan your credit union will seize the funds in your savings account.

How do I apply for a share-secured loan?

You can apply for a share-secured loan through your credit union’s website, in person at a branch or over the phone.

If an online application is available, you’ll need to log in to your account and fill out a form with information about how much you’d like to borrow, the account you want to use and information about a coapplicant. You also might need to submit documents verifying your income if the credit union doesn’t already have that information.

3 more ways to build credit

Don’t have a share account? These options might be a better choice.

  • Credit-builder loans. Borrow between $500 and $1,500 and pay it back into a new savings account at a local bank or credit union, usually at higher rates than a savings-secured loan.
  • CD loans. Borrow up to 100% of your certificate of deposit (CD) balance and repay it by the end of the maturity date, usually at 2% to 3% above the dividend rate.
  • Secured credit cards. These credit cards come with a security deposit that acts as collateral for your unpaid balance — and are available to all credit types.

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Bottom line

A share-secured loan can build your credit. But it won’t help you if you have a big purchase to make. And if you don’t already have a share account with a credit union, you can’t qualify.

Learn about more ways to boost your score with our guide to credit repair. Or, check out our guide to personal loans for more borrowing options.

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