We’ll make it easy for you to understand what a deposit secured loan is, when it can be used, the benefits and the disadvantages. To do this effectively, let’s break everything down to their component units.
First, What’s a Loan?
This refers to money you borrow from another entity. Usually, we take loans to get things we need but can’t pay for immediately. By an agreement with the lender, the borrower is able to get the benefits of using money they don’t have at the moment while the lender gets interest on the money the borrower took.
It’s a win-win situation because the borrower gets the money they need to meet a need or desire while the lender gets a profit on money they did NOT plan to use at the time.
Now that we know have a basic understanding of our subject, let’s go to the next question…
What Is a Secured Loan?
There are loans that a financial institution can give you based on your credit rating. Those are known as unsecured loans. You canclick here for more details. However, there are loans that you only get when you provide a form of collateral to the financial institution. This collateral can be what you are planning to finance with the credit advance. A few good examples are mortgage and auto loans.
In the case of a mortgage, the home you’re buying with the credit is used as collateral. That is, if you are unable to meet up with your repayments, the lender will foreclose the property in order to get back the loan they gave you (plus interest) or the remaining part you were unable to pay.
In the case of an auto loan, the vehicle is the collateral. But what if something happens to the vehicle; for example, if it’s in an accident and totaled? Well, smart lenders ensure that you have comprehensive insurance on any vehicle they finance. So, they are usually covered there.
The key takeaway with secured loans is that they are backed up by a valuable asset. This asset is at the lender’s mercy if you default in your loan repayment.
Now that we know what a secured loan is, let’s get to the final point…
What Is A Deposit Secured Loan?
You guessed right! It’s a loan that is secured by an amount you already have with the lender. So if you have savings of, say, $200,000; that you’ve accumulated over the years, most lenders will let you borrow against it.
If you default, they’ll simply take part of those savings necessary to write off your indebtedness to them.
Now, we expect the usual question most people ask…
Why on earth would anyone borrow money against the money they already have in the bank? Why NOT just use the money they have for whatever they need is? We will list some reasons why people go for deposit secured loans below.
1. Build Credit
It’s NOT a secret that there are people who have bad credit for one reason or another. But there are also people who have thin credit because they haven’t borrowed before or borrowed enough.
So applying for this type of loan gives you an opportunity to build up your credit score. But if you are considering going this route, make sure you are using a lender that reports your credit regularly to the credit bureau or the equivalent in your country.
Furthermore, ensure that you check to confirm that they are reporting your credit activities by checking your score from time to time. If you are in the US, you can do so here: https://annualcreditreport.com/
And ensure you DON’T miss any payments or make late payments. Either of these would prove counterproductive as they will hurt your credit score.
2. Maintain a Good Habit
Some people have worked so hard over the years to develop a savings culture. Breaking that habit by simply dipping into their savings right away might NOT be a good idea.
We all know it’s easy to drain out savings once you go touching them.
So to help maintain those savings, some folks decide to task themselves by getting a deposit secured loan. So, if they believe that what they want to use the loan for isn’t worth it, they have a strong incentive to avoid taking it in the first place.
All said and done; deposit secured loans have their disadvantages. While bankers may want to sell you on their benefits, don’t forget that you still have to pay interests. Don’t also forget that it’s the same savings that you want to protect that’s on the line as collateral.
So look at your peculiar situation and decide if it’s worth it or not.