Share Secured Loan: What and How Does it Work?
A share-secured loan is offered by banks and other financial institutes based on the number of deposits or savings available in your account. Your deposit and saving balance act as collateral that helps you receive the loan against it whenever required.
When you obtain a share-secured loan, the chargeable rate of interest will be much lower than other types of personal loans. Since the loan is secured, so it is called a share-secured loan.
If you require money or running a shortage of cash, you can obtain the necessary amount of loans from the credit institution. Even people with a poor credit score or no previous history of loans or credit can still get a share-secured loan.
Apart from meeting your immediate financial needs, these types of loans can help you build your credit score and obtain the loan. All individuals are equally eligible to apply for such a loan.
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What are Share-secured Loans?
As explained above, a share-secured loan is a type of secured loan that is granted by your bank or any other financial institute based on the amount of savings available in your bank. It is also called a certified pledge loan or simply a passbook loan.
Apart from the necessary cash available in your saving account, the bank or the lending institution has the right to use other assets in your savings account as collateral, too. It is done because if there is any default at the time of loan repayment, the lender can use the assets and cash available in the borrower’s account to get the loan account settled.
How do Share-secured Loans Work?
It works as follows. When you get a shared-secured loan, the available assets and cash available in your account will become inoperative.
It means neither the bank (the lender) nor you (the borrower) can withdraw or touch it. These inoperative assets will be frozen and become operative as soon as you clear the loan.
However, not all assets and cash deposits will get frozen. Only the equivalent amount of money or assets (depending upon the quantum of the loan you borrowed) will become inoperative. As soon as your application or request for a share-secured loan is approved, the lender would restrict your access to the account.
As far as the loan repayment process is concerned, it’ll be monthly automatic withdrawals or through monthly checks. If you fail to pay back the loan, the savings available in your account will be taken by the lender as collateral to clear the debt. This is why all borrowers are requested to make the payment on time to avoid such an embarrassing situation.
Late payment may also invite late fees and penalties. These charges can hurt your credit score in the long run. Borrowers can get a loan at a rate of just 1 to 3%.
Why Use Share-secured Loans?
There are plenty of reasons why individuals or borrowers may prefer taking share-secured loans against their deposits. Some of the reasons why should you use share-secured loans are mentioned below:
1. Building Credit History
Through making repaying the amount of the loan to the lending institution in the form of monthly installments, you get an opportunity to improve your credit score. When credit bureaus get to know about your credit history, it can improve your credit score. If you have a bad credit score, taking a share-secured loan can be brilliant. You can easily qualify for such a type of loan instead of the traditional personal loan.
2. 100% Safety Assured
Though you may have to pay some money and interest on the amount of loan taken, it’s a 100% safe process of taking a loan. Here, you are not only obtaining the necessary amount of money at a nominal rate of interest but also improving your credit history for the future.
3. It Works for All Purposes
Before taking a share-secured loan, you need not inform your bank about the purpose for which you are taking it. For example, in other types of loans, there is a specific purpose. Suppose, you are taking an auto loan, it means you are going to buy a car. Similarly, when you are taking a housing loan, it means you are about to buy a flat or condominium.
But when you take a share-secured loan, you can use the borrowed amount to pay back your previous loan, buy essential products, meet immediate needs such as medical emergency or use it for bearing the cost of transportation when you move to another locality.
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Who Should Take Share-secured Loans?
Those Who Don’t Want To Repay Back
It may sound strange but when you take a share-secured loan, you need not worry about paying it back. Though your intention should be to pay back the loan as per the agreed terms and conditions with the bank, in the event of non-payment, the bank or the lender will simply take your asset to cover the loan.
Those Who Obtain Loan at a Low Rate of Interest
A share-secured loan is provided to individuals at a nominal or low rate of interest. You may hardly need to pay something around 1 to 3% for the borrowed in the entire period of your loan duration. Thus, it is the cheapest loan option available to lenders.
Those Who Want to Improve their Credit Score
Share-secured loans offer an excellent opportunity for borrowers to improve their credit scores. So, if you are a newbie or want to borrow for the first time, share-secured loans will be the best option for you. With each successful monthly installment to the bank during the repayment period, your credit score will improve.
Things You Should Consider Before Taking Share-secured Loans
Compare Rates And Terms
Before applying for a loan, you need to shortlist the names of lenders who provide share-secured loans to individuals. If required, you can get your account opened with them. Please note that not all banks or lending institutes use all types of saving resources or assets as collateral. Many banks use certificates of deposit (CD) as collateral.
Rate of Interest
Though the rate of interest that will be charged by a bank for granting you a share-secure loan will be low, it won’t be the same everywhere. You have to personally check various lenders, interest rates charges, and terms and conditions.
Period of Repayment
In all likelihood, the period of repayment should be 10 to 15 years. It means by the end of the 10th year or 15th year, all your dues should be cleared. Depending upon the banks’ terms and conditions, they set the period of repayment. However, you should choose the repayment period of 15 years, as it’ll give you ample opportunity to improve your credit score, financial position, and also employment status to get the loan cleared.
The Amount of Loan You Need
Many times, you may not require a lot of money. You just need a certain amount of cash. In such a situation, you don’t need to opt for a share-secured loan. You can simply take financial help from your loved ones and friends to meet your immediate goals.
How Do You Qualify for a Share-secured Loan?
Qualifying for a share-secured loan is simple. Just go to your bank and apprise them of your financial situation. You need to show your updated passbook to the loan disbursal official for further action. If your request is approved, you’ll get the loan instantly deposited in your account. Alternatively, you can apply for a share-secured loan online at various banks and see which one accepts your application.
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It’s clear from the above discussion that obtaining a share-secured loan is a straightforward process. You can reach out to both banks and credit unions for necessary financial assistance. However, you must meet their eligibility criteria in order to get the amount of loan sanctioned by the officials.
Overall, a share-secured loan is a good option for people looking forward to receiving immediate financial help at the lowest rate of interest.