9

I see at least a few credit unions offering these savings-secured loans. I can kinda see the advantage to taking a loan against a CD with penalties for breaking, but share and savings accounts have me confused on why you'd pay that.

So, why might people take out a loan secured by liquid savings?

9

The purpose of taking a "secured loan" is to build credit. This might be done by someone who had a bad stain on their credit history such as a bankruptcy or foreclosure, or possibly by someone just out of school (presumably with few or no student loans),and no credit history. Not everyone needs to, or should do this, however.

The advantage for a borrower is that s/he gets to create a record of repaying a loan that will partly mitigate the bad credit history. The advantage for the bank is that it is "no risk," because the savings account is the security for the loan. That would make it willing to "lend" to a bad credit risk.

  • What would the lender do if you withdrew the money from the savings account before you paid back the loan? – DJClayworth Nov 7 '11 at 16:07
  • 1
    It depends on the lender. At my credit union, the credit line is tied to the account balance. – duffbeer703 Nov 7 '11 at 16:27
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    @DJClayworth: If the lender wanted full security for the loan, it would "freeze" the savings account until the loan was paid back. – Tom Au Nov 26 '11 at 0:35
  • Why does repaying a loan that it's not possible for you to default on help your credit rating? It says nothing about your creditworthiness. – Mike Scott Jul 1 '16 at 11:56
  • @MikeScott: It says something about your punctuality and ability to "pay on time." Your "behavior" is as much part of your creditworthiness as your objective financial situation. Many loans are secured by collateral (e.g. a mortgage on your house). This one is secured by a bank account. – Tom Au Jul 1 '16 at 15:06
5

I can see that building credit is a valid reason. I would also suggest another scenario, when you have locked up money in long-term savings, with a substantial penalty for early withdrawal. If you suddenly needed money then you might save money by borrowing against the long-term deposit rather than pay the penalties. This is especially true if you needed the money only for a short time.

  • Never seen a savings account with a withdrawl penalty. – jldugger Nov 7 '11 at 20:04
  • Some will offer them against CDs as well as savings accounts. – DJClayworth Nov 10 '11 at 17:47

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