If you’ve got money in your savings account or other cash in your possession, why take out a loan when you can just use your cash? During your life, you might run into personal and business reasons for taking out a loan against your savings. There are several different ways you can borrow against your savings, and the right option will depend on your unique circumstances. Understanding your options for borrowing against your own money will help you make the right call when, and if, you need to do this.
Read More: What Is the Advantage of a Passbook Savings Account?
Use a Passbook Savings Loan
A passbook savings loan is a loan that’s guaranteed by a matching amount in your savings account. If you have $5,000 in your savings account, your bank may be willing to lend you up to $5,000 and then put a freeze or hold on that amount. That means you can’t use your $5,000 to pay bills.
If you take out a $3,000 loan, you’ll have $2,000 left in your account to use as you need. Choose wisely when considering the amount of a passbook savings loan to go after.
While you might be able to find many different types of bank loans, passbook savings loans are a good option when you can’t get another credit card, a credit line increase on your current card, a business loan or other type of credit. Even if you have a credit card available to pay for a large purchase, a passbook savings loan will probably be a better option than using the card because the interest rate is lower. These loans are usually very easy and quick to open.
Read More: How to Put Money Into a CD
Open a Certificate of Deposit
Another way to use your savings as collateral is to open a certificate of deposit, then use it to secure a loan. A CD is a safe, low-interest product that helps you earn some money while using it as collateral.
You can open CDs for a matter of months, or get higher interest rates if you open a multi-year account. Lenders like this option because you can get your bank or credit union to put a hold on the CD for a specific time period to make sure the money is there to pay your lender when the time comes due.
Try the Friends and Family Option
One way to make family or friends feel better about lending you money is to show them that you have cash on hand, but need to keep it there for an emergency or to avoid fees. Once your parents, siblings or friends lend you money, you can blow through your savings before you pay them back, however.
Friend and family lending is always based on trust, but showing that you’ve earned and saved money can help increase their willingness to lend you money – often at zero interest. If necessary, you can agree to sign a contract to keep a certain amount of money in your savings account. You can also allow friends and family to place a claim, or lien, against your account so that in the event of your death, they are on legal record as having a claim to a specific amount against your estate.
- When you borrow against a savings CD account, the lender places a so-called "hard freeze" on the account. This means you cannot access the money inside the account until you have repaid the loan in full. If you fall behind on your payments, the lender can liquidate the CD and use the proceeds to pay off the debt.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.