A share pledge loan is a type of personal loan available only from a credit union. For an individual with a credit union banking relationship, this type of loan can be a low-cost way to borrow some money. Different credit unions will apply different terms to share pledge loans.
Credit Union Accounts
Credit unions use different terminology from banks to describe accounts and deposits in accounts. An account with a credit union is called a share account. When someone joins a credit union by depositing money in an account, he has ownership rights with the credit union. A credit union account is described as a share account earning dividends, but the account functions in the same manner as a bank account with a cash balance earning interest.
Share Pledge Loan
A share pledge loan is a loan provided by the credit union secured by money in a share account. The amount of the loan is limited to the amount of money on deposit in the account. If a credit union member has $25,000 in her share account, she could receive a share pledge loan for up to $25,000. If the loan is taken, the funds in the share account are frozen until the loan is repaid.
Pledge Loan Features
A share pledge loan will have an attractive interest rate. The rate is often set at a margin above the interest rate being earned on the share account. For example, the share account is earning 2 percent and the share pledge loan margin is 3 percent. The interest on the share pledge loan would be 5 percent. A share pledge loan will have fixed monthly payments of principal and interest to pay the loan off in a fixed amount of time.
Since the loan is secured by deposits in the credit union, credit qualification for a share pledge loan is usually easy and this type of loan can be used to rebuild a credit history. As the loan balance is paid down, the amount of money frozen in the share account will be reduced to match the outstanding loan balance. The limitation on share pledge loans is the credit union member must already have the money to back up the loan.
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