Savings accounts are referred to as share accounts by credit unions, due to the co-op, member-owned nature of these organizations. When you take out a loan using share funds as collateral, it's known as a share secured loan. Share secured loans can be a valuable tool to establish or rebuild your credit history. They're also helpful for consolidating debts at a low rate and financing purchases without actually tapping into your savings.
How It Works
In a share secured loan, the credit union places a hold on the amount you want to borrow against. The minimum often is set at $200 to $500, while the maximum usually is between 80 and 100 percent of your share account balance. The credit union disperses the loan proceeds in the form of a check or, more commonly, a deposit into your checking account. Depending on your credit union's policies, you make payments on the loan by automatic withdrawal from your checking account, direct deposit, or sending in a check each month.
The availability of the funds you use as collateral varies by credit union. Some release the funds incrementally as you make monthly payments. Other credit unions require you to pay the loan in full before you can access the secured portion of your balance. In either case, your shares continue to earn dividends while the funds are frozen.
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Share-secured loans carry very little risk for lenders, so the interest rate you pay is fairly low. Often, it's only 1 to 3 percent above the dividend rate you're getting on your share account. This low interest rate, coupled with the continued dividend earnings on your collateral funds, lowers the cost of borrowing substantially, especially when compared to other forms of credit.
You essentially are lending money to yourself, so qualifying for a share-secured loan isn't a matter of credit. This means you won't be denied for a thin or poor credit file, but your credit history can still have an impact on your interest rate and loan amount. Other eligibility guidelines may include:
- Membership with the credit union
- Minimum share account balance
- Willingness to disclose the purpose of the funds for any loans over $10,000, per the Bank Secrecy Act.