Cash Secured Loan Definition
With a cash-secured loan, the borrower deposits cash as collateral to guarantee the loan. The amount of the cash deposit varies depending on how risky the loan is, but there are some situations when the borrower deposits as much cash as the total value of the loan. Cash-secured loans are relatively rare, and their main uses are to establish or repair a borrower's credit history.
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Significance
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A young bank customer may not have a credit history, and may wish to start one early in life. The length of the borrower's credit history affects the total credit score. Banks offer secured credit cards to younger borrowers and borrowers with bad credit, since they do not qualify for an unsecured credit card. With a secured credit card, the borrower deposits cash in the bank, which is equivalent to a percentage of the borrowing limit on the credit card.
Fraud
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If a borrower defaults on a cash-secured loan, and has enough cash to pay off the loan, this is a warning sign of money laundering, according to the Federal Financial Institutions Examination Council. A borrower who tries to hide a source of money may use a cash-secured loan to pay a bill instead of paying cash, to provide the impression that the source of money is the lending bank.
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Misconceptions
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A payday loan or a cash advance is not a cash-secured loan. These types of loans usually require the borrower to provide a postdated paycheck, known as a deferred-deposit loan. The check is not valid until a future date, so the payday lender may not list it as cash on the balance sheet.
Warning
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The bank will always charge interest on a loan, including a cash-secured loan. The interest rate on a cash-secured loan can be very high, especially if the cash does not provide collateral for the entire value of the loan. A borrower with a good credit history or other valuable assets, such as a house and a car, usually does not need to take out a cash-secured loan.
Size
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Cash-secured loans usually have small values. A few hundred dollars is a typical limit for a risky loan, such as a credit card with easy qualifying requirements. A borrower with no credit history, such as a teenager, probably cannot offer a large cash deposit to guarantee a larger loan. A borrower may take out a larger cash-secured loan if the borrower wants to start a small business, since starting a small business is a risk, and the bank may not be willing to offer an unsecured loan.
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