What are share-secured loans and how do they work?

Written by: Sarah Sidlow
• •5 min read
A man lying on a bed uses a laptop to look into a share-secured loan.Image: A man lying on a bed uses a laptop to look into a share-secured loan.

In a Nutshell

A share-secured loan lets you borrow money from a lender, typically a credit union, using your own savings as collateral. They can be a good option for people with less-than-stellar credit or no credit history who want to build positive credit.
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If you’re trying to build or repair your credit with a loan and need to cover a big expense, a share-secured loan might be helpful. A share-secured loan lets you borrow money from a lender by using your own savings as collateral.

Sometimes, big expenses come up. If you’ve been exploring your options for a major purchase, you may have come across something called a share-secured loan. With a share-secured loan, you can borrow money against the funds in your savings account, typically with a credit union.

As you borrow, the funds in your account are frozen. When you pay back the loan — either in part or in full, depending on the credit union’s policy — the funds in your account become available again. Because your money stays in your account, you may still earn the dividends on your balance.

Another advantage of a share-secured loan is that because it’s backed by collateral, it may be easier to get if you need to work on your credit. It can also help you build credit as you make your payments on time and they’re reported to the credit bureaus.

Read on to find out whether a share-secured loan is a good fit for you.

What is a share-secured loan?

A share-secured loan lets you borrow money from a lender, like a credit union, using your own savings as the security or collateral. With this type of loan, you request money up to the amount on deposit in your savings account. Your credit union lends you the money, and in exchange it puts a hold on an equal amount of money in your account.

Your original savings remains in your account, but the money stays frozen until you pay back the loan, ether in part or in full, depending on the terms of your agreement.

This type of loan could be attractive to first-time borrowers or people with limited or not-so-great credit, because approvals can be instant and often don’t require a credit check.

As you make your payments on time and as agreed, a share-secured loan can help you build positive credit history. However, as with any loan, if you make late payments or fail to meet the requirements of your agreement, you could put your credit at risk.

How share-secured loans differ from other secured loans

A share-secured loan is one kind of secured loan. With secured loans, the borrower puts up a type of collateral, like a house, a vehicle or cash, to pledge payment of the loan.

A share-secured loan is a loan that uses the cash in your account as collateral. Other types of secured loans include mortgages, home equity loans, auto loans and certificate-of-deposit (CD) secured loans.

What is the difference between a secured and unsecured loan?

Is a share-secured loan a good idea?

In general, secured loans come with lower interest rates than unsecured loans, and can often be easier to get if you don’t have perfect credit. Taking out a share-secured loan and making regular payments on it could be a strategy for building or repairing your credit, so it might be a good idea if that’s your goal.

But while a share-secured loan means you don’t have to dip into the funds in your savings account, it can put your emergency safety net at risk. You should understand the pros and cons of a share-secured loan to decide if it’s a smart choice for you.

Share-secured loans: Pros and cons

While collateral loans are a way to get access to funds, they may come with risks, too. Here are some advantages of a share-secured loan, and some things to look out for.

Pro: Inexpensive

Since you’re putting up your own savings as collateral, the lender is taking on minimal risk, meaning they likely won’t charge a high interest rate. Plus, because your funds stay in your account, you’ll still earn dividends on that money — something you wouldn’t be able to do if you withdrew the money from your account to cover your expenses.

But be aware that it will cost you something to borrow this money, and it could potentially be more than what you’re earning in your savings account.

Pro: Quick approval

When you apply for a share-secured loan, you might be surprised with an immediate approval. Share-secured loans are based on the funds you already have in your account, so the credit union won’t need to check your credit to approve the loan. That can be helpful for first-time borrowers or people who have less-than-stellar credit.

Pro: Improve your credit scores

The financial institutions that offer share-secured loans often promote them as a way to help improve your credit by establishing a record of on-time payments.

Con: You could lose your collateral

If you can’t pay back your loan, your financial institution will take your collateral — in this case, your savings — to get their money back.

Con: There may be other consequences for defaulting on a secured loan

In addition to taking your collateral, your financial institution could subject you to debt collection, trigger negative marks on your credit reports or even sue you if you don’t pay your loan back or breach your contract.

Things to consider before applying for a share-secured loan

A share-secured loan could be a good option for you if your credit isn’t tip-top and you need to cover an expense without dipping into your own emergency funds. It might also be a good way for you to rebuild your credit history.

But keep in mind that if you don’t make the necessary payments on your share-secured loan as agreed, there could be serious financial consequences, including hurting your credit or losing your savings altogether.

If you decide to take out a share-secured loan, make sure you’re clear on the terms of your agreement, including any fees, the payment schedule, and what could happen if you fail to pay back your loan on time.

You may also want to look into other personal loan options, like other types of secured loans, or see if you qualify for an unsecured loan.

Finally, if your primary goal is to build your credit, you may want to consider a credit-builder loan or being added as an authorized user on a credit card. You might also think about opening your own secured credit card.

Making reasonable purchases and paying your credit card bill in full and on time can be a good way to establish a good credit history, which will serve you well on your financial journey and may make future loans easier to get.

*Approval Odds are not a guarantee of approval. Credit Karma determines Approval Odds by comparing your credit profile to other Credit Karma members who were approved for the personal loan, or whether you meet certain criteria determined by the lender. Of course, there’s no such thing as a sure thing, but knowing your Approval Odds may help you narrow down your choices. For example, you may not be approved because you don’t meet the lender’s “ability to pay standard” after they verify your income and employment; or, you already have the maximum number of accounts with that specific lender.

About the author: Sarah Sidlow is a freelance writer and editor based near Detroit. She has a master’s degree in journalism from Georgetown University. Sarah’s work has appeared in Luxembourg’s national newspaper, Washington City Paper… Read more.