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A guide to cash-secured loans

Having cash in the bank is an opportunity to rebuild your credit

A guide to cash-secured loans
A guide to cash-secured loans (image: Pixabay)

If you’ve come through a period of financial instability that has left you with a weak credit score, you’ll appreciate that it can take a long time to rebuild your credit history to a position of strength.

But if you’ve managed to accumulate some savings in the process, then you may be able to access a cash-secured loan.

It may seem a bit counter-intuitive, to apply for credit when you have the funds available in your savings, but there are a number of benefits to using your savings as a credit building strategy.

How does a cash-secured loan work?

A cash-secured loan uses your savings as a security deposit. In return for the funds that your lender is providing to you, they’ll require you to deposit your savings with them.

This reduces the risk to the lender, as if you default on the loan they still hold your savings as security.

Most lenders offering this type of product will have some sort of lending ratio that they’ll be capped to – probably at a maximum they’ll be able to lend you up to 90% of the amount of savings that you have on deposit.

You’ll still be paying interest on the funds that you’re borrowing, but most likely the interest rate will be lower than an unsecured product.

What can cash-secured loans be used for?

Generally there’s no limitation on what you can choose to use your cash secured loans for – it’s a low risk product for the financial institution so the terms and conditions are often fairly broad.

However, like any form of credit, it’s wisest to put the funds towards something that you really need or will help you work towards your long-term goals.

How does this type of loan help to rebuild your credit score?

Being approved for a loan, and being able to demonstrate that you’ve complied with the repayment requirements and repaid the debt all counts favourably to your overall credit assessment. This type of sound financial management demonstrates to potential future lenders that you are a good credit risk.

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