What Is A Passbook Loan?

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.

When Should You Consider a Passbook Loan?

You might be wondering why someone would pay to borrow money when they already have the savings for it—and that’s a fair point. However, you may consider using a passbook loan versus your savings because you want to:

• Build credit. One of the best uses for passbook loans is building credit. You’ll want to double-check that your bank or credit union reports your payments to the credit bureaus. If they do, it’s a good way to start building a track record of on-time loan payments when you otherwise might not qualify for a loan.
• Secure a low interest rate: Since passbook loans are secured with your savings, banks and credit unions generally offer much cheaper rates—even for people with bad credit.
• Avoid using your savings: You get to keep your savings with a passbook loan, and for a lot of people, that’s worth it. It’s understandable why you might not want to drain your savings in one fell swoop if you’ve spent years building up your emergency fund.

Where to Get Passbook Loans

If you haven’t heard of passbook loans before, there’s a good reason: They’re relatively rare. Most major financial institutions don’t offer them, although you might be a bit more likely to find them at credit unions versus banks.

If you’re interested in passbook loans, reach out to your current bank or credit union and check if it offers them. If it doesn’t, you’ll need to decide whether it’s worth moving your savings to someplace that does. This can be a bit of a hassle, and the interest rate you’ll earn on your savings while you’re repaying the loan may change.

If it’s worth it to you, reach out to the bank or credit union you’re interested in and verify that you’ll be eligible for a passbook loan.

How to Get Passbook Loans

Follow these general steps to get a passbook loan:

1. Prepare your savings. You can generally borrow 90% to 100% of the funds in your savings. If you have money in different accounts, move them into one central account to use for the passbook loan.
2. Find a lender. Contact someone directly at your bank or credit union to see if they offer passbook loans. If not, you’ll need to find a new bank or credit union that does.
3. Apply for a passbook loan. Complete the application for the passbook loan. Depending on the bank or credit union, you may be able to do this online, in person, over the phone or by mail.
4. Get the funds. If you’re approved, your lender will disburse the funds. It may also move your savings to a different account or place a hold on your savings until the loan is paid off.
5. Repay the loan. Sign up for autopay so you never miss a payment. Missing payments can have a negative impact on your credit.
6. Get your savings back. Once the loan is repaid you’ll regain access to your savings plus any interest you earned.

Pros of Passbook Loans

• Easy to qualify: Passbook loan credit requirements tend to be more flexible than other loan options. Some banks and credit unions don’t consider your credit score for approval.
• Helps you build credit: If you make all of your payments on time and your bank or credit union reports those payments to the credit bureaus, it’ll help you build credit.
• Low interest rates: Since the lender is guaranteed to get paid one way or another, it usually offers low rates, even if you have bad credit.
• Earn interest on your savings. As long as you pay the loan off you’ll get to keep any interest that you earn on your savings while repaying the loan.

Cons of Passbook Loans

• Potential credit damage: Like any loan, making even a single late payment can cause damage to your credit score. Only take out a passbook loan if you’re sure you can repay it.
• Risk of losing savings if you default: If you default, your lender will use your savings to repay the remainder of the loan.
• Savings are off-limits: You won’t be able to access your savings until you start to repay your loan. If possible, keep some money in a separate account so you’ll still have an emergency fund if something comes up.
• Loan amount determined by your savings: Most banks and credit unions limit you to a loan amount of up to 90% of your savings, although a few will let you borrow up to 100%. This means you are stuck with a loan amount that’s dependent on the size of your savings.