How Do Certificate Secured Loans Work?

Qualifying for an unsecured loan can be difficult if you don't have an established credit history, or if your credit report shows delinquencies, collection actions or bankruptcy filings. A certificate secured loan is one way to build or rebuild your credit profile by effectively taking a loan against your own money. This greatly reduces the risk to the lender.

Loan Basics

Certificate-secured loans generally are issued by credit unions. You borrow money based on the amount you deposit into a dedicated share certificate or savings account. The funds are frozen when the loan is taken out. They may be released piecemeal as loan repayments are made, or they may be restricted until the entire balance is paid off. You'll generally be able to qualify for a loan equal to the deposited amount, though some credit unions limit you to a certain percentage of that deposit.

Interest Gap

You'll often continue to earn interest on the funds used to secure the loan, but it's still going to cost you money in the long run. The interest rate will be higher than what you'll receive in interest. While this gap between what the bank pays depositors and what it charges for loans is true for all loans, with a secured loan you're unable to take the borrowed funds and invest them elsewhere in an attempt to increase your return. As a result, you know entering the agreement that your return on investment will be negative. The purpose of these loans is to give you the chance to show you can handle debt, rather than making a profit.

This rate may be fixed at a specific percentage, or it may be a set amount over what the savings account is earning. Most credit unions have a 1 to 5 year repayment period, and payment requirements vary.


  • While you're generally able to pay off a certificate secured loan early without penalty, it's better for your credit score to make regular payments for at least 12 months. That way, there's a longer record of on-time monthly installment payments on your credit report.

CD Secured Loans

Banks and other financial institutions offer similarly-secured loans with a certificate of deposit serving as collateral. Much like a certificate secured loan, one benefit is that most don't involve a credit check. CD secured loans can have terms as short as six months and as long as five years. The money isn't generally available until the repayment schedule ends.