What is a savings secured loan

what is a savings secured loan

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Types

Banks allow people to secure loans with regular consumer and business savings accounts. People cannot borrow against minor savings accounts because minors are ineligible for credit products. Most savings accounts pay minimal interest rates that fluctuate over time. Banks freeze funds in the savings account securing the loan, but continue to pay interest on the funds. The loans normally have interest rates at least 2 percent higher than the rate of return being paid on the savings account.

Time Frame

Savings accounts are open-ended products, so in theory borrowers can stretch loan payments out over any period of time they choose. Some banks set loan term limits of five or 10 years for savings secured loans. Generally, savings secured loans have fixed monthly principal and interest payments, although some lenders allow business entities to establish savings account secured lines of credit. The lines of credit remain active for up to 20 years and work like other revolving products such as credit cards, except that the bank requires the savings account as collateral.

Benefits

Primarily, consumers use savings secured loans to establish or repair credit. Most banks write savings secured loans to anyone who has a regular income source, regardless of credit score. The banks report the loan payments to the major credit bureaus and timely payments boost credit

scores over time.

Business entities often use savings secured loans because many industries require businesses to maintain significant cash reserves for liability and bonding purposes. Business owners report the liability of the loan in their financial statements but can also report the savings balances in their cash reserves.

Considerations

Certificate of deposit secured loans are usually more cost-effective than savings secured loans. Certificates of deposit pay higher interest rates than savings accounts because CDs are not liquid and banks pay higher rates for people who commit funds to the bank for specified periods of time. Most savings and CD secured loans have no prepayment penalties. However, paying off the loan does not enable the borrower to close the underlying CD prematurely without incurring a penalty fee.

Warning

Banks require anyone with at least a 20 percent ownership interest in a business to sign as a guarantor for business loans, including savings secured loans and lines of credit. If the business defaults on the loan or makes late payments, the bank reports the delinquent status of the account to the credit bureaus, who record it on the credit history of all of the guarantors. This sometimes creates problems for people who sign on loans before opting to leave general partnerships or corporations. Despite having left the business, they are still liable for the loan.

Source: ehow.com

Category: Credit

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