What Is A Cash Secured Loan?

What Is A Cash Secured Loan?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated September 6, 2022

Good credit will open many doors when it comes to loans and credit products. But if you haven’t yet established credit or your credit scores are currently on the low side, you may want to take steps to give it a boost. And a cash secured loan may be a great way to do that.

While you won’t get access to the loaned funds right out of the gate, you’ll have the chance to improve your scores with each timely payment made. Plus, you’ll be contributing to a savings account that you can tap into at a later date. 

What Is A Cash Secured Loan?

A cash secured loan is a unique credit product designed to help you build or improve your credit. Rather than providing you with a lump sum of money upfront, as is the case with most traditional loans, your lender will withdraw your loan payments from your bank account and deposit the funds into a secured account. 

Once the loan is paid off, you can access the funds that your lender deposited into your secured account. You can then use that cash as you see fit, including investing, paying down debt, or covering major expenses. This is a great way to save money and build credit.  

How Does A Cash Secured Loan Help You Build Credit? 

As mentioned, your lender will withdraw your payment from your bank account each month and add it to a secured account until your loan amount is fully repaid. The withdrawals will take place according to a set schedule, like other loans. 

Every loan payment made will be reported to the credit bureau(s), which is what will help you build a positive payment history. This, in turn, can help build your credit scores.

Benefits Of A Cash Secured Loan

There are several perks to a cash secured loan, including the following:

  • Build good credit. Every payment made towards repaying the loan will be reported to one or both credit bureaus. Timely payments are one of the most important factors when calculating credit scores. As such, every time you make a payment on time and in full, it can help build your credit scores. 
  • No collateral needed. Some lenders require borrowers to provide collateral to help minimise the risk they’re taking, this is especially true for those with bad or no credit. But with a cash secured loan, you won’t have to put up your home, car, investments, or any other valuable asset to get approved. 
  • New financing options available. Take advantage of other credit-building products, such as a secured credit card, using your savings as collateral. 
  • Bad credit accepted. You don’t need high credit scores to get approved for a cash secured loan. In fact, you may not need any credit at all. Since no cash is provided upfront, approval requirements are a lot more flexible. 
  • Save while building credit. A cash secured loan doesn’t just help you build credit, it also helps you save money. Each payment you make is stored in a secured account which you can access after the “loan” is paid off. This structure forces you to save money. This can be particularly helpful if you’re the type to tap into your savings a little more than you should. With this type of loan, you won’t have access to the funds until your outstanding balance is paid off.

Drawbacks Of A Cash Secured Loan

While there are plenty of advantages that come with a cash secured loan, there are also a few drawbacks you should be aware of before applying:

  • High interest – As noted earlier, you’ll likely pay a relatively high interest rate on a cash secured loan compared to other loan types. In turn, it can make the loan more expensive. 
  • Additional fees – Other upfront fees may need to be paid in addition to the APR, which you’ll need to cover out-of-pocket before you start saving. 
  • No access to funds until the loan is repaid Unlike other loan types which give you upfront access to the funds, you’ll need to wait until your cash secured loan is repaid before you can get your hands on the money. If you need a loan to cover an emergency expense, you may want to look at another type of loan. 
  • Low borrowing amounts – Loan amounts for cash secured loans are usually on the low side. If you’re in need of a sizable loan to cover a high-cost expense, a cash secured loan might not be for you.

Cost Of A Cash Secured Loan

Like other loan types, cash secured loans come with interest. However, you may find that loan rates on cash secured loans are higher than other loans. 

In fact, you can expect to pay as much as 20% APR or higher. Depending on the loan amount and the loan term, you could be paying hundreds of dollars in interest over the life of your loan, which you won’t have access to until the loan is fully repaid.

There may be other fees involved with a cash secured loan, including administrative fees. You’ll have to verify what fees your lender charges for cash secured loans to find out exactly how much your loan will cost you.

How Much Will A Cash Secured Loan Cost?

To calculate how much you’ll pay for a cash secured loan, let’s say you take out a $1,000 loan with an interest rate of 15% and an administrative fee of $150. Payments are made monthly over 1 years. 

Loan Amount$1,000
Interest15%
Fees$150
Monthly Payments $90.26
Total Cost$1283.12
Total Interest + Fees$233.12

Alternatives To Cash Secured Loans

A cash secured loan may be a great way to build your credit, but before you settle on a cash secured loan consider other alternatives, including the following:

Pay Your Bills On Time 

The number one way to give your credit scores a boost is to make sure all your bills are paid on time and in full every billing cycle. Even if you can only make the minimum payment, paying on or before the billing due date is crucial. As mentioned above, your payment history is one of the most important factors in determining your credit scores. As such, paying your bills on time and in full is crucial. 

Reduce Your Debt 

Another great way to improve your credit scores is to pay down your existing debt. The lower your debt obligations, the more money you’ll have available to put towards your savings. Plus, a lower debt load could make it easier for you to get approved for other loans in the future. 

Keep Old Accounts Open 

Don’t close any credit card accounts, even if you haven’t used them in a while. Old accounts — especially those in good standing — can be good for your credit scores. Old accounts can affect the age of your credit history which can affect the calculation of your credit scores. Generally, the older the age of your credit accounts, the more positively it can affect your credit scores.

Apply For A Secured Credit Card 

A secured credit card is relatively easy to get approved for. In fact, approval is almost guaranteed so long as you can provide the minimum security deposit. These financial products act like conventional credit cards, except you’re not spending on credit. Instead, your security deposit serves as your credit limit and is held by the creditor while your account is open. Every time you make a timely payment, your creditor will report your payments which can help you build your credit scores.

Use Credit Counselling Services

To manage your finances, work with credit counsellors and learn how to budget effectively. These financial experts will help you come up with ways to whittle down your debt and work on building your credit scores so you’ll have more financing options available to you in the future. 

Check Your Credit Report

Make a habit of checking your credit report at least once per year. Pulling this report will give you the chance to find out what your credit profile looks like and if there are any errors that could be dragging your scores down unfairly. If you notice any mistakes, have them reported and fixed right away. 

CostCredit ScoreCredit AlertsLink
FreeYesYesVisit Site
Free*
(with credit monitoring)
YesYesVisit Site
FreeYesNoVisit Site
FreeYesNo-

Cash Secured Loan FAQs

Can I qualify for a cash secured loan with bad credit? 

Yes, you can qualify for a cash secured loan with bad credit. In fact, cash secured loans are generally designed to help borrowers with bad or no credit improve their credit scores. Since the lender doesn’t actually provide any money upfront there’s little risk involved for the lender, making it easier to get approved for. 

Can a cash secured loan negatively impact my credit?

Yes. Cash secured loans are reported to the credit bureaus to help you build credit once you’ve made a timely payment. However, if you miss payments or make late payments then a cash secured loan may negatively impact your credit. 

Can I pay off my cash secured loan early? 

Most lenders will allow you to pay off your loan early without any penalty, however, it depends on each lender. However, given that a cash secured loan is designed to help you build credit, it’s better to make payments for the length of the program than to pay it off early.  

Final Thoughts

If you’re someone who struggles with self-discipline while building a savings account and good credit – then a cash secured loan may be perfect for you. Though the cash won’t be immediately available, you’ll eventually have a nice financial nest to tap into, while establishing and building solid credit.


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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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