Personal Loans

Is a Savings-Secured Personal Loan Right for You?

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If you have money in a certificate of deposit (CD) or personal savings account, you may be able to leverage those funds to get a savings-secured personal loan. As a secured loan, you’ll use your CD or savings as collateral. In return, you could qualify for rates that are lower than on an unsecured personal loan.

To help you decide whether or not a savings-secured personal loan is a good option for you, we’ll the various pros and cons of this product.

What is a savings-secured personal loan?

With a savings-secured personal loan, your cash or CD assets are used as collateral. Collateral is money or another asset that the bank or lender can seize if you don’t pay the loan back.

Secured loans often offer lower interest rates than unsecured personal loans. They are easier to qualify for, too, as the lender is taking on less risk with your collateral on the line. That said, a savings-secured loan can be a good choice if you have cash assets but want to build your credit.

Pros vs. cons of savings-secured personal loans

Savings-secured personal loans have several advantages for some borrowers.

  • Savings-secured personal loans may be easier to get if you have a low credit score or no credit history, but do have cash to back your loan.
  • You may qualify for a lower interest rate than you would with an unsecured personal loan.
  • The money in your savings account is still earning interest, which reduces the overall cost of the loan.
  • Making on-time payments on your savings-secured personal loan will help build your credit and raise your credit score.
  • Some lenders may not require a credit check for a savings-secured loan. If you have a savings account with that lender, less paperwork will be required, which could lead to faster approval.

It’s important to choose your lender carefully because not all savings-secured personal loans are alike.

  • If you default on the loan, you could lose your savings. If your savings doesn’t cover the loan, you could still owe money.
  • As with other types of loans, late payments on a savings-secured loan could hurt your credit score and reduce your chances at securing low interest rates in the future.
  • Your lender may place a hold on your savings account for the amount you want to borrow, to ensure their collateral is there if they need it.
  • You could still be denied a savings-secured loan if a lender sees red flags in your credit history or believes you may default on the loan.

How to get a savings-secured personal loan

The process of applying for a savings-secured personal loan is similar to applying for an unsecured personal loan. Banks, including online banks and credit unions, may offer savings-secured personal loans.

Before you pursue your secured loan options, check your credit score. If your credit score is good, you may be surprised to discover that an unsecured personal loan at a low interest rate is a better choice, without risking your hard-earned cash. If you have less-than-ideal credit, you may first want to improve it before applying for a loan. A lower credit score could make it harder to qualify for a loan.

But if you have history as a customer with a specific bank or credit union, it could increase your approval odds for a savings-secured loan since you already have assets with the institution.

Follow these steps to choose the best lender for you and improve your chances for approval.

  • Shop around for a lender with low interest rates, no prepayment penalties, no loan origination fees and terms that work for you. Make sure you understand and are comfortable with their conditions as well.
  • When you compare interest rates, make sure you are comparing Annual Percentage Rates (APRs), which often include loan fees. (However, not all lenders include fees in the APR.)
  • Consider applying for preapproval. Many lenders allow you to apply for preapproval with a soft credit check, which won’t affect your credit score. A preapproval can give you an idea of what terms you may qualify for. This can help you decide on a lender.
  • When you choose your lender, determine what you will need for collateral. You may need to keep money in a checking, savings, money market or CD account for a certain length of time before qualifying for the loan. Some lenders may offer you faster approval if your money is deposited at their financial institution.
  • Follow the lender’s instructions to apply online, by phone or in person.

The bottom line

A savings-secured personal loan isn’t right for everyone, but if you have cash in the bank and are looking to build your credit, it is one option. Savings-secured personal loans typically let you borrow more than a secured credit card would, as long as you have cash to back your loan.

Savings-secured personal loans allow you to borrow money to spend on virtually anything, with a fixed interest rate and stable monthly payments.

They can be a good option to consolidate high-interest credit card debt, get money for emergency expenses, pay for part-time school or professional development if you don’t qualify for student loans or even go on a much-needed vacation without tapping into your savings account.

Most importantly, savings-secured personal loans allow you to build your credit at a relatively low cost, to secure a brighter financial future.


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