How do Share Secured Loans work?

A stock backed loan can be a good place to start when looking to build up your credit.

These loans belong to a category of loans known as credit construction loans and despite their name, they are less about lending money than they are about helping you build credit.

Stock backed loans are products of credit unions, where accounts are often referred to as stock accounts to represent partial ownership. Savings loans are a comparable banking product, and both work similarly to CD-backed loans.

How they work

The money in your share account with a credit union serves as security for the loan and serves as a guarantee for the credit union that the loan will be repaid. If you don’t pay, the credit union may confiscate the money in your stock account, according to Justin Pritchard, a certified financial planner with Approach Financial in Montrose, Colorado. Share-backed loans are only available from credit unions.

Credit unions operate similarly to banks, but have memberships with specific eligibility requirements – often based on employer and location. There are also online-only credit unions that you can join for a small fee or donation. The National Credit Union Administration provides a credit union directory so you can find credit unions near you.

Stock accounts are like savings accounts, so you may get interest on the balance in your account as well – although funds in the account will be frozen when you take out a stock-backed loan. Make sure that you do not need this money for the duration of the loan repayment period.

After taking out a stock backed loan, it is important to make timely loan payments to support your credit as best as possible and to report this positive payment history to the credit bureaus.

Pro tip

Inquire about the best stock account prices with local credit unions near you.

While the credit union will often borrow the full amount in your account, “that is not the purpose. It will likely be a small loan that will help improve your credit score so that you can qualify for better credit later if you are trying to buy a car or a house or something, ”says Pritchard.

If your goal is to build up credit, it is even better to keep it smaller.

“There’s no need to burn tons of money and pay interest on a huge loan if you don’t make a lot of interest,” says Pritchard. “I don’t think borrowing $ 10,000 instead of $ 200 will improve your credit any further, so keep it as low as you can to have those payments reported to the credit bureaus.”

Why Use Share Secured Loans

As a loan to create credit, stock-backed loans have rather narrow use cases. While they can be a great way to build your credit score, despite the name that includes “loans” in it, they are not the best option for those in need of cash. Here are two main reasons why a stock backed loan can make sense:

  • How to build up a loan: Making your loan payments on time and in full will help your credit score.
  • Save on future loans: A positive credit score is important when applying for larger loans such as a mortgage or auto loan. You can get a cheaper rate if you have better credit.

Who are they for?

Make sure that taking out a loan to build a loan is aligned with your financial goals before you begin. For those in financial trouble, and especially those already struggling to repay other loans and debts, taking out these types of loans “doesn’t make sense,” says William Hatton, CFP at Billfold Budget Counseling in Los Angeles .

In addition, adding another loan is not a solution, especially if the interest you get on the stock account is significantly lower than the interest rate on the loan.

“This is not for people in dire circumstances,” says Hatton. “However, if you’ve got out of debt and come around the corner, this is what you should consider. But make sure you have a good savings base first before you lock up your money. “

These loans really should be used to build credit. If you don’t need to build up a loan, you can likely get a better interest rate and loan amount with another product, such as: B. a personal loan or, in some cases, even a credit card.