Everything You Need to Know About Equity Loans | Smart Change: Personal Finance

If you need to take out a loan but don’t meet the minimum qualification requirements, you may be in trouble. Unit secured loans help solve this problem by having fewer qualification requirements, which can help you get a loan to build your credit score. While they’re a great option for borrowers with bad credit, they come with their own limitations, which we’ll help clarify for you.

What is an equity secured loan?

A loan secured by shares is a secured loan using the funds in an interest-bearing account – savings account, deposit receipt (CD) or call money account – as security. Because the money in your account secures and safeguards the loan, your bank or credit union can reclaim the money in your account to cover losses if you fail to make your repayment obligations.

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Secured loans make transactions less risky for banks and credit unions because the collateral guarantees they will get their money back one way or another. Because of this risk reduction, secured loans typically have fewer qualification requirements, making the application process easier for you. Some lenders won’t even check your creditworthiness as long as they can show that you actually have enough savings to pay for the loan.

You may have heard a stock-backed loan go by a variety of names, including a savings-backed loan, a cash-backed loan, and a savings book loan. They are all the same.

This is how equity-backed loans work

Since savings loans use the money in your interest-bearing account as collateral, you need one saving account, CD or money market account with money in it to get started. Regardless of which account you use, when you apply for a stock-backed loan, you agree to pledge that money to the bank while you pay off the loan.

When it comes to credit limits, you’re usually limited to borrowing a percentage of your savings account. However, banks and credit unions may set different limits; You’ll typically see a minimum loan amount of between $200 and $500 and a maximum of between 80% and 100% of your balance.

Banks and credit unions also charge interest on these passbook loans. They typically set a fixed interest rate by adding 1% to 3% to your account’s annualized percentage return (APY). For example, if your interest-bearing account yields 1% APY, the interest you pay on your equity-backed loan would range from 2% to 4%.

Once the lender has spent the money, the money will be held in your account so you cannot access it. Depending on your lender and the terms offered, you make fixed monthly payments over a period of five to 15 years. You can access your money again when you pay off your loan.

Although your balance is frozen while you pay off the loan, your account will continue to accrue interest. However, because the interest rate on your equity-backed loan is 1% to 3% above your APY, you’re paying more interest than you earn.

Why should you use an equity secured loan?

At first glance, it seems a bit silly to borrow a chunk of money when you’re already Have you saved that much in your account. However, the main reason for using an equity secured loan is that build credit. If you don’t have credit yet or you’ve made a few mistakes in the past, an equity-backed loan can help set you on the right track.

Finally, you must have most other types of loans good credit to qualify. It is possible to find Loans for Bad Credit (Results up to 580) but they are usually very expensive and your qualification is not guaranteed. Equity-backed loans offer an easier way to get a construction loan.

How to get an equity secured loan

  1. Save some money: Cash secured loans allow you to borrow against the money you already have. You need to make sure you have money saved that you can use as collateral for your loan.
  2. Find lenders: Unit secured loans don’t come around very often, but they do exist if you’re looking for them. They are more often at credit unions, but make sure you follow the membership requirements as you may not be eligible to join all credit unions (and therefore may not be eligible for all equity-backed loans). If you’re currently a member of a credit union, see if they offer equity-backed loans.
  3. Compare prices: If you have multiple options to choose from, ask for a price quote. Make sure they a soft credit draw when they check your credit to protect your score.
  4. Deposit your money: Once you’ve found the right lender, it’s time to open an account and deposit your savings. The lender can tell you what type of account you should put your money into, whether it’s a savings account, a CD account, or an overnight deposit account.
  5. Apply for credit: Once your account is open, you can fill out the loan application. If you are approved, you will receive your money and your account will be frozen until you repay the loan.
  6. Sign up for automatic payment: This step is optional but highly recommended. The only reason to take out a stock secured loan is to build credit and that is the most important factor forms your creditworthiness is your payment history. Even a single late payment can completely ruin your efforts. Signing up for Autopay prevents this by ensuring all your payments are made on time.

Alternatives to interest-secured loans

Unit-backed loans help you build credit, and they help you do it inexpensively. But they’re not the only option you have. Check out these alternatives before applying for an equity loan.

construction loan

If you haven’t already built a pot of money (and many of us haven’t), build a small one construction loan might be a better option for you. These loans are not secured by anything, so they may carry a higher interest rate. Just like with equity-backed loans, you may have better luck finding them at a credit union rather than a bank.

Secured Personal Loan

If you have something of value, but not necessarily a savings account, secure one private loan might be a better option for you. It works very much like a stock loan, except you use something else as collateral, usually a vehicle, like a car, boat, or RV. You can get a personal loan from banks, credit unions or online lenders.

Secured Credit Card

Finally, another good choice is a secured credit card. Secured cards have credit limits equal to a cash deposit you make held in a collateral account. As long as you make all your payments on time, opening a secured card can help you build credit by showing creditors your ability to manage debt responsibly.

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