By Michelle Spitzer / Bankrate.com
One of the easiest ways to build your credit is to obtain a shared secured loan from your local bank or credit union. The loan is secured by your savings account, share certificate account or money market account. A share certificate account is similar to a certificate of deposit but it is issued by a credit union rather than a bank. The money in your account is used as collateral to protect the lender in case you fail to repay the loan.
Because they’re secured, these loans are less risky for lenders, so the interest rates are usually lower than they are for unsecured loans. The maximum amount you can borrow on shared secured loans is usually equal to the amount in your collateral account. After the loan is paid off, the money in your collateral account is freed up. Some lenders even allow you access to the money in increments as you pay off the loan.
The loan terms are often flexible, allowing you to use the money however you want.
As you make on-time monthly payments, the lender reports this information to the credit bureaus, enabling you to establish good credit and raise your credit score.
Secured credit card vs. shared secured loan: Shared secured loans are similar to secured credit cards in that both require a deposit or collateral. However, the secured credit card is a line of credit that you can reuse as you pay it off. The credit limit on the secured credit card is the same amount as your deposit. The interest rate on secured credit card and a shared secured loan is usually lower than it is for a traditional credit card.
Shared secured loan vs. credit-builder loan: Shared secured loans are also like credit-builder loans in that both can be used to build your credit. Credit-builder loans, however, are created solely for the purpose of building credit. They are not secured because you are not able to access the borrowed funds until the loan is paid.
Here’s how it works: The lender agrees to loan you a certain amount of money and puts it in an account to which you don’t have access. You make monthly payments on the loan and when the loan amount is paid off, you receive the money in the account, plus dividends.
Other types of secured loans:
• Stock secured loans allow you to use stock as collateral to secure your loan. Credit unions, banks, mortgage companies and other financial institutions offer stock secured loans. You can usually borrow between 50 percent and 80 percent of the stock’s current market value. The lender holds your stock during the period of the loan, and you are entitled to any stock dividend payments earned during that period. After you have repaid the loan, your stock is returned to you.
• Home equity loans are secured by your home. Repayment terms are five to 15 years. With home equity loans, you borrow a lump sum.
• A home equity line of credit, or HELOC, provides you with a line of credit against the equity in your home.
The downside of secured loans: If you fail to make the payments on a secured loan, the lender can take the asset that you used as collateral. For example, if you take out a home equity loan and are unable to repay it, the lender could foreclosure on your home.
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