How to Use Cash-Secured Loans to Build Credit
Getting a cash-secured loan can help you build credit. At the same time, you get to preserve cash in an account that you can use in the future. Some people are not familiar with this concept since you are technically borrowing against your savings in the bank. However, there are clear advantages that make applying for a cash-secured loan worthwhile.
The basics of a cash-secured loan
Approval for a cash-secured loan is easier because you qualify by depositing funds with your lender. This lowers the risk on the lender’s part because you are essentially pledging your cash savings as collateral. If you stop making payments on the loan, the lender just keeps your deposit as debt repayment.
To use a cash-secured loan to build credit, borrow from the same bank or credit union where you keep your money in a savings account, money market account, or certificate of deposit. Your spending limit should be no higher than the amount of cash in your account.
How to build your credit with a cash-secured loan
Taking this loan out is a good way to start improving your credit if you cannot qualify for other types of loans. The financing works simple enough. You can use your cash-secured loan for any legal purpose. The loan can come in the form of a lump sum deposit to your checking account or as a line of credit with a cash-secured credit card.
Interest will still be charged even if the lender already has your deposit to guarantee the loan. This rate is usually lower compared to other loans and is particularly useful if you have a low credit score. Fixed rates also apply. Having this fixed rate for several years can work in your favor if your savings earn more or interest rates on other loan alternatives.
If you are taking out a cash-secured loan to build credit, you do not need to apply for a massive loan. Several thousand dollars should be enough, in fact, it is common to start with a loan smaller than that amount. You can even ask about borrowing a few hundred dollars. A smaller loan is less burdensome on your finances. You only lock up as much money as you have to, and you can pay lower interest costs over time.
Just make sure your lender reports payments to the credit bureaus. This ensures you are building credit through your loan. You can verify reports by checking your credit periodically. Finally, always pay on time to increase your credit score. The cash-secured loan will only help you build credit if you practice responsible money habits.