Would you like to be able to pay for a large purchase without emptying your savings account?
A pledge loan, or a savings secured loan, is a best kept financial secret that can help you make a large purchase and keep your savings account intact at the same time.
My Story
Many months ago, my daughter and I were discussing the fact that saving up and using cash to pay for a large purchase is the most financially wise choice.
However, replenishing a depleted savings account is often hard to do.
I have memories of my mom going to the bank and pledging her cd’s (certificates of deposit) as collateral when she needed to make a large purchase.
She didn’t want to use a credit card and she didn’t want to cash in the certificates of deposit.
Instead, she used her own money to secure a loan and used the proceeds to pay for whatever it was she needed to purchase.
After the purchase, and after the loan was paid off, the funds were still intact.
A quick call to the bank confirmed that a pledge loan, or savings secured loan, is still an option at most credit unions and banks.
What is a pledge loan?
A pledge loan, or savings secured loan, is a loan given using the funds in a personal savings account as collateral.
Note: The terms pledge loan and savings secured loan are basically the same thing. I use the terms interchangeably.
As an example, if you purchase a vehicle, the vehicle is the collateral. If you fail to make the payments, the vehicle will be repossessed.
With a pledge loan, the funds in your savings account are the collateral for whatever it is you’re purchasing.
If you fail to make the payments on the loan, instead of the item being repossessed, the balance that you owe at the time you default will be withdrawn from your savings account. (Biggest reason to proceed with caution.)
Because your savings account is at risk, many financial experts advise against this kind of loan.
There are advantages to taking out a pledge, or savings secured loan.
A savings secured loan typically offers a low interest rate.
A lower interest rate is not a guarantee and will vary from bank to bank.
However, at the credit union where I bank the interest rate on pledge loans is three percent. Since the funds in my savings earn one percent, even with a loan against them, the net interest rate on a loan is two percent.
Not too shabby, really.
A pledge loan is a great way to rebuild bad or slow credit.
Depending on the institution, approval may not require a credit check. However, the payment status of the loan could be reported to the credit bureaus.
The credit union where I bank offers automatic approval with no credit check and reports payment information to all three credit bureaus.
Even if you aren’t using a savings secured loan as a credit rebuilding tool, assuming payments are made on time, it will only serve to help and not hurt your credit.
If you are using a savings secured loan as a credit rebuilding tool, make sure that the financial institution reports to the credit bureaus.
A loan is not revolving.
Unlike a credit card, a loan is once and done.
When a loan is paid off, the account is closed. There won’t be a credit card laying around offering a temptation.
And for me, the biggest advantage to using a pledge loan to pay for a large purchase is the end result.
At the end of the loan, your money is still sitting safe and secure in your savings account.
Of course, there are cons to using a savings secured loan.
First, and most obviously, your cash is at risk.
If you default, the bank or credit union will withdraw the amount you owe at the time you default from your savings account to pay off the loan.
There will be a freeze on your account for the amount you owe.
While the loan is being repaid, the amount you owe will be unavailable to withdraw.
In my experience, for every dollar that is repaid, that amount is unfrozen.
That may not be the case in every situation.
Each lending institution will have their own terms. Make sure you read and understand them.
You will be paying interest to borrow your own money.
Any loan comes with interest, even a pledge loan.
If your goal is to pay no interest, this option is not for you.
Would you like to be able to pay for a large purchase without depleting your savings account?
Then look into a pledge loan. It might just be the right choice for you.
I am not any kind of financial professional and this post is not intended to be any kind of financial advice.
My goal is simply to offer little ideas and solutions for everyday life. I am passing this on as a possible solution. Before making any financial decision, make sure that you talk to your own financial professional.
Updated 04/19/2023
***********************************
TAKE ACTION!!!
Check out Micki’s Little Letter
Comments or questions? Email me at Micki@LivingbyLittles.com
Like It? Share It! It’s a little thing that means a lot to me!
***********************************
Awesome information. Thanks!