If you need a loan to make a major purchase or to consolidate debt, banks offer numerous options, including cash-secured loans. With this type of loan, you pledge a certain amount of money that will go toward repayment of the loan.

Identification

In a cash-secured loan, a financial institution gives you a specific amount of money, and you promise to repay the money in equal payments over a certain amount of time. If you stop making payments or default, the bank can take the cash or money that you pledged.

Cash Sources

Cash-secured loans usually involve certificates of deposit, a type of bank account where you pledge to leave your money in the account for a set period of time. In other cases, you pledge funds in savings or money market accounts.

Interest

Like all loans, financial institutions will charge you a percentage of the amount owed, known as interest, in exchange for granting the money. The rate of interest is usual lower for cash-secured loans.

Benefits

A cash-secured loan allows you to maintain your savings and continue to earn interest while you repay the loan. Often, financial institutions will consider applicants with slightly lower credit score or income for cash-secured loans than for other types of loans because of the low risk to the bank.

Considerations

Until the cash-secured loan is repaid, you do not have access to the money pledged for the loan, even if the money is in a product that ordinarily provides easy access, like a savings account.

Source:

EconomyWatch.com: Cash-Secured Loans