Cash Secured LoanCredit Repair Definition
A type of loan backed by funds held in a savings account or certificate of deposit (CD) owned by the borrower.
Definition
A cash-secured loan is a type of secured loan where the borrower pledges funds held in their savings account or certificate of deposit (CD) as collateral. The lender places a hold on these funds, typically equal to the loan amount, for the duration of the loan term. Because the loan is fully secured by cash, it represents very low risk for the lender, making it easier to qualify for, even with poor credit or no credit history. These loans often come with lower interest rates compared to unsecured loans. Cash-secured loans are commonly used as a tool for building or rebuilding credit, as timely payments are reported to credit bureaus. Once the loan is fully repaid, the hold on the savings account or CD is released.
Frequently Asked Questions
How does a cash-secured loan help build credit?
Lenders report your payment activity on cash-secured loans to the major credit bureaus. Making consistent, on-time payments demonstrates responsible credit behavior, which helps build a positive credit history and improve your credit score over time. It's particularly useful for individuals with limited or damaged credit.
What happens if I default on a cash-secured loan?
If you fail to make payments on a cash-secured loan, the lender has the right to use the funds held in your pledged savings account or CD to repay the outstanding debt. This minimizes the lender's losses but means you lose access to your savings. The default will also be reported to credit bureaus, negatively impacting your credit score.
Can I access the funds in my savings account during the loan term?
No, the funds pledged as collateral are typically frozen or held by the lender and cannot be accessed until the loan is fully repaid. However, you may continue to earn interest on the funds in the savings account or CD, depending on the lender's terms.
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