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Should I Get a Personal Loan If I Have Savings Account?

The interest you pay on personal loan is higher than when you get it in your savings account. Should I use my savings or take out a loan?
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor, which helps consumers make better financial decisions.  Silvermann’s areas of expertise include investing, banking, and credit cards. 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. Aside from being a finance expert, his background includes working as a business and financial analyst. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor, which helps consumers make better financial decisions.  Silvermann’s areas of expertise include investing, banking, and credit cards. 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. Aside from being a finance expert, his background includes working as a business and financial analyst. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

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

Can You Get A Personal Loan When You Have Money In Savings Account?

One of the main reasons why many people have money in their savings account is to have enough cash to cover all types of emergencies, as well as to use them for such things as home improvements, buying appliances, furniture, and other items.

So the main idea here is that if you face an emergency or want to make some large purchase, then you need to withdraw the money from your savings account and then later add money to your deposit account on regular basis to refill the deficit.

However, an alternative to this approach is to take out a personal loan to fund those expenses. This might be a controversial decision for some people and no doubt it has its own benefits as well as drawbacks.

Bank/institution
APY Savings
APY CDs
Loan APR

axos-bank-logo

Axos Bank
Up to 0.61%
0.20%
7.15% – 17.99%

discover bank logo

Discover Bank
4.30%
2.00% – 5.00%
6.99% – 24.99%

Sofi bank logo

SoFi Bank
up to 4.50%
/
8.99% – 23.43% (with discounts)

citi bank logo

Citibank
4.25%
0.05% – 4.90%
9.99% – 23.99% APR
Marcus logo
Marcus
4.30%
3.70% – 5.00%
6.99% – 24.99%

The most obvious objection to this decision would be the question: Why would you want to pay interest on loans when you can get that money for free from your savings account?

Well, that logic makes a lot of sense. However, there can be cases, when taking out a personal loan, when you have money in the savings account might be a worthy decision. Some people just need to improve their credit rating and history. Something which is not possible if you do not take on any type of debt.

At the same time, some people might use this as a tool for financial discipline, something which we will discuss in more detail below.

Pros & Cons Of Getting A Loan Instead Of Using Savings

Getting a personal loan, when you have money in the savings account does have some advantages and disadvantages.

Here are the main pros and cons you should know:

Pros
Cons
Opportunity To Rebuild Credit
Loan Interest Is Much Higher
Maintaining A Large Emergency Fund
Fees And Penalties
Fixed Monthly Payments

Taking out a cash-secured loan might be a decent option if you are looking for ways to establish or rebuild your credit.

If you take out a such loan and keep making payments on time, then this can help you to improve your credit score. Since the interest rate is not typically that high on those loans, this can be an affordable way to improve your credit.

The fact is that depleting an emergency fund can have very negative consequences for one’s financial life and even beyond.

There is always a risk of losing your job, your business becoming insolvent, or facing some emergency repairs at home or a health emergency.

When it comes to purchases, many people simply prefer to pay for them with monthly fixed installments, instead of taking out a large amount of money from their savings accounts.

This can be a more convenient and less financially painful option for many individuals.

One of the biggest downsides of getting a personal loan when you have money in savings accounts is that you are guaranteed to take a loss on interest rate differentials.

Banks and credit unions typically charge 4% to 10% interest rates on secured loans. On the other hand, the best rates on savings accounts provide lower rates.

This means that the amount you will have to pay on interest payments will be considerably higher than the interest you receive on deposits.

Some personal loans have fees, calculated as a percentage of the borrower's amount.

In addition to that, if you fail to make payment on time, then you will be charged a late payment penalty, which can also have a very negative effect on your credit score.

On the other hand, if you just withdraw the money from the savings account, you will not have to pay those fees and penalties.

Things To Consider When Getting A Personal Loan Instead of Using Savings

Besides advantages and disadvantages, there are also some things to consider before taking out a personal loan, when you have money in the savings account:

  • Fees – One important thing to consider here is whether or not the bank or credit union charges origination or other types of fees on personal loans. Some financial institutions do charge some additional fees, therefore, in this case, your total expense can be considerably higher than just the money spent on the interest.
  • Interest Rate – you can leverage the fact that you have money in your savings and get a lower interest rate. Also, too high an interest rate on your loan may be a turn-off and you'll still change your mind and use your savings instead of getting a personal loan. 
  • Loan Purpose – Personal loans can be used for a variety of purposes. make sure you take out a loan for a meaningful purpose. In case of missing payments, you may need to use your savings in the end. Getting a personal loan for vacation may not be the best thing to do. You don't want to 

When It Might Be A Good Idea?

At this point, it’s helpful to point out that several cases when taking a personal loan when you have funds in a savings account might make sense. Here are some of those scenarios:

  • Looking to build your credit – If you have a poor or average credit rating and want to improve it, then getting a personal loan might be helpful. If you can not get approved for a regular loan, you can apply for a secured loan. With some banks, you can get share-secured and cash-secured loans with as low a FICO score as 580. 

However, with poor credit, the interest rate on your loan will be high.

  • Small emergency fund – Many financial experts, including Dave Ramsey, teach people to have at least three months' worth of expenses in their savings account. Now, if your emergency fund ends up depleted if you withdraw money, it might be better to get a personal loan instead of making such a withdrawal. This way, you can ensure that you have sufficient funds to deal with any unexpected emergencies.
When It Might Be A Good Idea?
When It Might Not Be A Good Idea?
Looking to build your credit
Savings accounts with large balances
Small emergency fund
High-Interest Rate

When It Might Not Be A Good Idea?

Despite some of the advantages we discussed above, it is important to point out that taking out a personal loan when you have money in a savings account is not the right choice for every individual.

Here are some cases, when taking such a step might not be a good idea and can potentially be damaging to one’s finances:

  • Savings accounts with large balances – If you have enough funds to pay for your planned purchases and still retain a sizable emergency fund, then taking out a personal loan might not be that useful. For example, if you have $100,000 in your savings account and want to make a home improvement worth $15,000, then even after this expense, you will still have $85,000 left in your account, which is a sizable cash reserve to fall back on in the case of emergencies.
  • High-Interest Rate – these days the economical climate is changing are interest rates are getting higher. If you get too high rate on your loan, you may want to skip it and use your savings account instead

Alternatives

It goes without saying that taking out a personal loan when you have money in the deposit account has some viable alternatives, here are some of them:

  • Taking a securities-based loan – You can actually use your investment account, instead of using a CD or savings account to secure a loan. With this loan, you can keep investing and earn some dividends, you just can not withdraw all of your funds, until the loan is paid off. In this case, you are not guaranteed to make a net loss. This is because your portfolio can possibly give you higher returns than the interest rate on the personal loan.
  • Secured credit card – If your main goal is to improve your credit score, then applying for a secured credit card might be a viable alternative. In most cases, you just need to come up with a minimum deposit of $200 or more and if you keep up with payments, then this can allow you to improve your credit score. In fact, you can even avoid paying any interest, if you pay your balance in full by the end of the statement period.

FAQs

Most banks and credit unions do consider savings account money to be useful as collateral.

The main idea here is simply: the bank will freeze the equivalent of the loan amount and only unfreeze the funds when the loan is fully paid off.

The interest rates on savings accounts are constantly changing, depending on the Federal funds rate, set by the US Federal Reserve, as well as some other factors.

As of September 2023, most major banks still have low-interest rates on savings accounts, ranging from 0.01% to 0.5%. However, you can still earn up to Up to 5.02% with some banks.

If the US Federal Reserve keeps up with its interest rate hikes, then it is possible that banks might increase the interest rates they pay to depositors on savings accounts.

Banks do have access to credit bureau reports, therefore, they usually have updated information about all of your personal loans, as well as other debt you carry.

Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor, which helps consumers make better financial decisions.  Silvermann's areas of expertise include investing, banking, and credit cards. 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. Aside from being a finance expert, his background includes working as a business and financial analyst. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.
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