Nov 4, 2021

What’s a Savings Pledge Loan?

Young man looks down at his notepad with a computer in the foreground
Buying a big-ticket item means having to borrow money, but if you’re just starting out or working on repairing your credit, getting a loan may prove to be difficult. But how can you build credit if you can’t get a loan because you don’t have credit? It’s a catch-22 that a Savings Pledge Loan can help solve. Before considering if a Savings Pledge Loan is right for you, learn more about how it works and how it can help you build a path towards a better financial future. 

How does a savings pledge loan work?

A savings pledge loan uses the money in your savings account or certificate account as collateral against the amount you borrow. The amount you can borrow is determined by how much you have saved. Because the loan is secured with a monetary pledge, the lender doesn’t have to worry about recouping its losses if the borrower happens to default–making this lending option a lot less risky for lenders. In turn, this gives people looking to build credit the opportunity to borrow without having to have a good credit score. 

Just like an unsecured loan, a savings pledge loan requires the borrower to make fixed monthly payments until the end of the loan term which can vary and go up to 144 months. At Hughes Federal Credit Union, secured funds from loans pledged against a savings account become available as the loan balance declines.

What are some of the benefits of a Savings Pledge Loan?

Building credit means establishing good payment history. A savings pledge loan allows you to not only add a variety to your mix of credit accounts but help you prove that you can borrow responsibly. Besides the benefit of helping you re-establish or build credit, a savings pledge loan can also be used to help another in need of a better score. Funds that are used to secure a savings pledge loan can be pledged from another person’s account making it easy for parents to help the young adults in their family learn how to borrow and maintain a positive payment history. Because your funds are in a savings account, your money still earns dividends while you borrow! Savings pledge loans also usually offer a lower interest rate than other loans. 

What are some other options for building credit?

If you’re considering a savings pledge loan to help you build credit, it’s important to remember the importance of payment history and the components that help make up that category, such as making payments on time. Payment history is one of the most important factors for credit bureaus, accounting for 35 percent of the credit score pie. To help you stay on top of your bills, set up automatic withdrawals from your bank or credit union account. 

You may not have credit accounts but if you’re renting there could be a way to give your credit score a boost. You can try reporting your good rental payment history to credit bureaus by utilizing third-party services to help you apply other expenses like utility bills and rent to your credit report. Users of rent payment reporting services saw a credit score increase by an average of 29 points after two months of rent reporting according to a 2020 case study by RentTrack.

If you happen to know of a responsible credit card owner, you can ask to become an authorized user on their account. Because you aren’t the primary account holder, you aren’t liable for the debt accrued on the account and any negative impacts that come with defaulting. Their good payment history will show up on your credit report helping prove good payment history. It’s a great way to start building credit while learning how to spend wisely. While you may not be accountable to the bank or credit union, you are accountable to the primary account holder. 

Ready to start building credit through a Savings Pledge Loan? Here’s what you’ll need:

  • Social Security Number
  • A valid form of identification (U.S. Driver's License/ID or U.S. Passport with Signature)
  • Previous address if at current address less than two years
  • Joint Applicant/Co-Borrower information (if applicable)
  • If applying for membership: Information to fund your new account (existing HFCU member number, account and routing number from another financial institution, or a credit/debit card)
  • If applying for a loan: Previous employer information (if at current employer less than two years), Proof of income, and Collateral information.
Learn more about getting started with a Savings Pledge Loan at Hughes and apply today!