Personal Loans » Advice » What Is Cash Secured Loan and Should You Consider It?
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What Is Cash Secured Loan and Should You Consider It?

Share-secured loans are very helpful if you want to establish or rebuild your credit history or consolidate debt.How exatckly do they work and what are the main advantages of share-secured loans? Here's all you need to know:
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Transparency is a core value for us, see how we make money.

Table of Content

What is a Cash-Secured Loan?

A cash-secured loan is a loan that you take using your savings account or other assets in a share account to guarantee the loan.

Whereas in a line of credit, you use assets such as your house as collateral for your loan, banks and credit unions make loans backed by savings accounts available to borrowers.

Similar to a shared secured loan, when you take out a cash-secured loan, the bank freezes the corresponding funds in your savings account while the loan remains outstanding.  They will become available again after you’ve paid off the loan.

Cash-Secured Loans: How Do They Work?

It's fairly simple.

When you borrow from your savings account, the bank/credit union simply places a hold on the account you want to use as collateral equivalent to the amount you want to borrow.

Most banks or credit unions set a minimum of around $200 to $500 while the maximum is around 80% to 100% of your share account balance. The credit union would just issue a check for the proceeds of the loan or, in common practice, credits your checking account for the amount.

Payments for the loan will depend on your bank/credit union’s policies – some will automatically debit your checking account, others through direct deposit, or through a check payment each month. The release of the hold or availability of the funds that you’ve used as security will depend on the bank/credit union.

Some of them will release the funds progressively as you make your monthly payments.  Others will require you to pay off the loan in full before you can access your funds.

Cash-secured loans that the bank/credit unions release in a lump sum usually carry fixed interest rates so that your monthly payment stays the same over the period of the loan.

Can You Pay off a Secured Loan Early?

Yes. You can pay off your secured loan early. Most lenders don't charge prepayment penalties for this. If you are using a secured loan for credit building purposes, it might be worthwhile to keep making payments, even if it is possible to pay it off sooner.

If your debt-to income (DTI) ratio makes it difficult to get another loan, you may consider repaying a credit-building loan sooner. To lower the ratio, you will need to repay that credit-building loan early.


Benefits of Using a Cash-Secured Loan

Here are some reasons why it’s better to use a cash-secured loan over than just using the cash in your savings account:

It Builds Your Credit

Similar to credit builder loan, this is really good if you have bad credit or no credit at all because it can help you build your credit.

Every time you make a loan payment or eventually pay off a loan, the bank reports it to the credit reporting agencies.

Because of this, your credit score will get a boost.  You should ask your lender to report your loan payments to the credit bureaus and later confirm that they did so by looking at your credit report.

In this chart using Experian data, you can see the average FICO score has increased significantly over the last decade.


You can ask for a free credit report from each of the major credit reporting bureaus once a year, including Transunion, Experian, or Equifax.

If your focus is on rebuilding your credit, make sure the loan will achieve your objective:

  • Make sure that the lender reports your payments to the credit bureaus; if they don’t, there will be no benefit on your credit scores.
  • Verify your credit report periodically (it’s free) so check if the lenders are actually reporting your loan payments.
  • Pay on time. Late payments will harm your credit and it will cause you to work a lot harder to improve it.

It Offsets Interest Costs

If you’re paying interest to rebuild your credit through a loan, it really helps if you can recover some of those costs through the interests that you earn from your savings.

But you should only borrow and pay interest only if you will receive other benefits.

When you use your money as collateral, the bank/credit union will free your account until you pay off the loan.

 Maybe you could access some of them after you’ve fully paid the loan but the good thing is that your money continues to earn interest.  Of course, it will be less than what you pay on the loan but better something than nothing.

You Can Use a Cash-Secured Loan For Any Purpose

Many loans – like auto loans – have specific purposes and uses.  You can use a cash-secured loan for a variety of things.  Good borrowing practice, however, dictates that you should only use it to pay for something that you actually need, not want.

Protects Your Savings

If you’re the type of person who can’t manage to keep your savings account intact, a cash-secured loan will help you.  In a way, the loan rewards you when you rebuild your savings through loan payments.

This means that at the end of the loan’s term you will have cash reserves that you can use in case you need them again.

Alternatives to Cash-secured loans

You can build credit with cash secured loans. They also make it affordable. They are not the only option. Before applying for a loan secured by shares, be sure to review these options.

  • Share-secured Lending

A share-secured mortgage is a secured loan that borrows money from an interest-bearing account. This could be a savings account, certificate or deposit (CD), or money market account. 

Your bank or credit union may repossess your money to recover its losses if you fail meet your repayment obligations.

  • Credit-builder Loan

If you don't yet have a pot of money built up (and many of us don't), a small credit-builder loan might be a better option for you. 

These loans don't come with any security so you might pay a higher interest rate. Similar to share-secured loans and other types of loans, it is possible to find them better at a credit union than a bank.

Secured Personal Loan

If you have something of value but not necessarily a savings account, a secured personal loan might be a better option for you. This works in the same way as a share-secured loans, except that you use collateral such as a vehicle. You can get personal loans from banks, credit unions or online lenders.

Secured Credit Card

Lastly, another good choice is a secured credit card. Secured cards allow you to have credit limits equaling a cash deposit that you make and which is held in a collateral account. A secured card will help you build credit if you pay all your bills on time. It also shows creditors that you can manage your debt responsibly.

More Ways to Build Your Credit Score 

Good financial habits are essential to building your credit score. Checking your credit score online is a good place to start – it's available online for free.

In this chart compiled with LendingTree customer data, you can see that those with a 720+ credit score pay an average of 7.63%. At the other end of the scale, for those with a poor credit rating of less than 560, the rate shoots up to an eye-watering 113%.


Your credit score will be affected by loans such as personal loans and student loans. Credit card payments are also reported to the credit bureaus. This means you will want to make all payments on time.

Your score will rise steadily the more you work on it. Although it takes time to rebuild or improve your credit score, the sooner you get started, the better.

1.  Pay Bills on Time

Lenders will examine your credit history to see if you can pay back the loan. Lenders will offer loans to applicants who pay their bills on time. Late payments can have a negative impact on your credit score.

You should set up automatic payments if you have the opportunity. This will make it less likely that you forget to pay your bills.

2. Credit cards: Keep Balances Low

Your credit limit will not be exceeded, so you'll want to make use of your credit card. This is because of something called the credit utilization ratio.

This is done by adding all your current credit card balances together and then dividing it by your credit limit. Your credit score will improve if your utilization ratio is lower.

3. Keep Unused Cards Open

You should also not close any unused credit cards. Your credit utilization ratio will rise if you close your accounts. Your score will increase if you keep your accounts open longer.

It is a good idea to keep your oldest accounts open.

How Long Does it Take to Build Good Credit?

According to the major credit bureaus, it can take between three and six months of using credit for your credit score to start to change. This is true if your credit score is just beginning to improve.

It can take 12-18 months to rebuild your credit score if you have a low credit score. However, every positive financial action that you make will likely positively impact your credit score.

Higher credit scores actually make it more difficult to improve them. But, once you reach that point, your credit score will be higher because you have developed good habits.

You will want to check your score fairly often to ensure you are trending in the right direction. You should check it at least once per month if you want to make any changes.

This will allow you to see if your efforts are working. You will be able quickly to make changes if it isn't. You will also be able catch any errors in your score. One in five people make mistakes in credit history.

You can file a dispute with the credit companies if you notice any mistakes. Your score will increase if it is fixed.


If you have savings but a low credit score that prevents you from getting a traditional personal loan, cash secured loans are a suitable option.

You can increase your credit score with little to no danger because you're using your funds to pay back the loan. The credit bureaus will be notified each time you pay a monthly installment on the loan, improving your credit score.

To qualify for cash secured loans, which are essentially a loan from your own resources, is typically pretty simple. Your savings or investment account will be used as collateral for your loan, so typically it doesn't matter what your credit score is. However, your credit score might have an impact on the loan's interest rate.

Each lender has different guidelines for cash-secured loans; some let you borrow the entire balance of your savings account, while others only let you borrow a portion of it.

Cash secured loans have a lot of alternatives. A secured credit card is the financial product that most closely resembles it. These are linked to a deposit account, and the balance of your deposit account determines the credit limit. If you don't make the payments, the money is just deducted from your account.

A credit builder loan is an additional option. Similar to a cash secured loan, this operates by requiring repayment before you may receive the money. When the loan is repaid, your lender will place the money in a savings account from which you can withdraw it.

You can fix your credit if you declared bankruptcy. The bankruptcy record may remain on your credit report for up to 10 years after it has been added. The effect, though, will eventually wear off. Start by developing healthy credit habits; pay your bills on time, maintain low credit card balances, accumulate an emergency fund, and use credit cards sparingly.

For your circumstance, you might also look for a credit product. Viable possibilities include getting a credit-builder loan, secured credit card, or asking a friend with good credit to co-sign a credit card.

Most common forms of lending institutions, including banks, online lenders, and credit unions, offer personal loans.

Your financial condition will be evaluated by the lender to ensure that you will be able to make the repayments. Some of the parameters that are looked at include your credit score, income, and debt to income ratio. You will often receive a better interest rate the better your credit score is.

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Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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