A passbook loan, also referred to as a share-secured or savings-secured loan, lets you borrow against your savings accounts and use it as collateral. They are typically a handy way to borrow money while you’re rebuilding credit because they tend to have more flexible qualification requirements.
Depending on the lender, it may report your payment history to the main credit bureaus, which can help boost your credit over time as long as you make on-time, consistent payments.
How Do Passbook Loans Work?
Passbook loans are essentially a version of a secured personal loan. Because passbook loans use your savings as collateral, which means the lender can repossess your savings if you default, you need a savings or certificate of deposit (CD) account to be eligible.Eligible borrowers can typically borrow 90% to 100% of their savings accounts, although they can borrow less if needed.
When deciding on your loan amount, keep in mind that you won’t be able to use your savings throughout the life of your loan. Some financial institutions even require you to move your savings to a separate account while you’re repaying it.As you repay your loan, your lender will release the same amount from your withheld savings. If you repay your loan as agreed, you’ll have access to 100% of your savings collateral, plus any interest you’ve earned in the meantime.