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How a savings secured loan can help you rebuild credit

With a savings secured loan, your savings account, money market account, or certificate of deposit (CD) acts as collateral. In return, you get the credit you need. Here’s how a savings-secured loan works:

Savings secured loans can be effective tools to improve your credit. Here are four benefits that make them a smart option to repair your credit.

1. Bad credit won’t block your application

Lenders typically approve unsecured personal loans for applicants with good or excellent credit. This way, lenders limit their risk and avoid losing money.

But savings secured loans are a more accessible option, even for borrowers with bad credit. The lender faces little risk of losing money by extending you a savings secured loan.

If you fail to repay the debt, the lender can keep your savings to recoup its losses.

2. You’ll rebuild credit while paying lower interest rates

When calculating interest rate offers on traditional personal loans, most lenders base the rate on your credit score. If you have bad credit, you’ll likely face higher interest rates than someone with better credit.

Not only are savings secured loans easier to get, but their low risk offers another benefit in low personal loan rates. You’ll usually pay less interest on a savings-secured loan than you would on an unsecured personal loan.

3. Paying on time could build a positive payment history

You’ll build a strong credit payment history if your lender reports monthly savings secured loan payments to the credit bureaus.

If you make every loan payment on time each month, you hopefully can boost your credit score. But the opposite is also true: If you make a late payment or miss a payment, your credit could be hurt.

Make sure to check with your lender to see if your monthly payments are reported to the credit bureaus.

If you’re not great at remembering your debt’s due dates, set up systems that can act as fail safes:

4. A savings-secured loan can improve your credit mix

Lastly, consider your credit mix that is, the kinds of loans and accounts listed on your credit report. Owning different types of credit accounts will give you a better credit mix, which could boost your credit score.

In the FICO scoring model, for example, your credit mix accounts for 10% of your score.

If you don’t already have installment loans, a savings secured loan could diversify your credit mix. This, in turn, could boost your credit score and make you a more attractive credit applicant in the future.

Where to get a savings-secured loan

If you’re interested in using a savings secured loan to build credit, you’ll need to find the right lender. There are two types of lenders that most commonly offer savings-secured loans:

Most lenders will require you to have an open savings account with them before they approve you for a savings secured loan. Because of this, it’s often simplest to start your search with your current bank.

Once you find a lender you like, you can apply for a savings secured loan. If possible, limit yourself to a small loan secured by savings. You’ll have lower monthly payments, tie up less cash to get your loan, and hopefully be able to repay the debt quickly to free up your savings.