What is a Cash-Secured Loan?
A cash-secured loan is a type of credit that is protected by some sort of cash reserve. In contrast to other secured loans (mortgages, mostly), a cash-secured loan is extended when a borrower can prove that he or she has liquid capital to protect the lender's investment. These loans are often short-term, large, and designed for business customers.
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Identification
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A cash-secured loan is one that has a cash reserve as backing. For example, a bank consumer may be qualified for a cash-secured loan if he or she already has an existing savings or money market account with said bank. It's important to remember that the cash reserve must match 100% of the loan--including any applicable fees and interest charges on the loan.
Features
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The best feature of the cash-secured loan is the interest rate. With normal unsecured loans, banks are taking larger risks and therefore must charge higher interest rates. Interest rates on cash-secured loans can be as low as 2% to 3% over the interest rate you are earning on the cash reserve you're using for security. In some cases, this can be well below national mortgage rates.
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Benefits
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Cash-secured loans are beneficial for business customers. These customers are often in need of large influxes of cash to meet payroll, purchase inventory, buy other supplies and generally continue their operations. Instead of taking high-interest unsecured loans, these customers can use their cash reserves (which are earning interest in separate accounts) to secure short-term, cash-secured loans for quick capital.
Other Benefits
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Most lenders who offer cash-secured loans will offer large loan amounts--in fact, some banks set minimums on loan amounts (Bank of America sets a $10,000 minimum on cash-secured loans). Business customers with large obligations and inconsistent cash flow can benefit from these large advances.
Warning
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Personal banking customers should think very carefully before securing their savings or investments to a loan. Unlike business customers--who receive regular revenue from the sale of goods or
services--personal customers usually do not receive massive flows of cash. Therefore, repayment on a large cash-secured loan may be more challenging. And, in the worst case scenario, a personal loan customer may lose the entire sum of his or her savings if he or she defaults on the cash-secured loan.
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