You Can Borrow Money From Yourself Using a “passbook Loan”
When we become adults, most of us learn that money has a strange habit of disappearing almost magically. We use a wide range of psychological tricks to prevent ourselves from simply throwing that money away into the universe, and sometimes these tricks actually work and we manage to accumulate a tidy sum in our savings account . In fact, the average American has over $60,000 in savings (not counting retirement accounts), although this figure is a little misleading since the median average savings amount is only $8,000, meaning that half of Americans have less than $8,000 in savings. However, if you’re like most Americans, eight thousand (or even significantly less than eight thousand) is still a lot of money and not easy to save .
That’s why sudden big expenses are so tragic: you’ve worked so hard to build up your savings, and now a roof repair, car repair, or medical bill will wipe out all those savings. Seeing your savings disappear into thin air can be demoralizing—plus, if you have to use everything you have to pay a big bill, you’ll have no emergency fund left. Luckily, if you have savings, there’s another option worth considering: a passbook loan.
Borrowing from yourself
A passbook loan (also known as a savings loan) is a loan secured by your own money. With a savings book loan, your bank freezes some of the money you borrow but keeps it in your savings account. You then pay off the loan like any other loan, and the bank gives you your savings back. Essentially, you are paying to borrow money from yourself.
For example, let’s say you have $5,000 in your savings account and you need your roof repaired ( average cost: $1,150 ). You can take money from savings and pay the repair bill, but then you will simply lose that money. Or you can pay for the repairs with a credit card and keep your savings, but end up paying high interest on the loan. Instead, you can take out a passbook loan. The bank freezes $1,150 of your savings, and when you pay back the loan, that money becomes available again.
Advantages
Borrowing from yourself and paying for this privilege may not seem like such a trick at first glance. If you simply pay the bill with your savings, you will avoid paying interest on top of it. But there are several reasons why a passbook loan can make a lot of sense:
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You keep your savings. Saving is not easy. If you have a small, small amount of money spent on bills, it’s depressing, and there’s no guarantee that you’ll be able to save that amount ever again.
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The percentage is low. Because a passbook loan is secured by money you already have in your account, you typically get a really high interest rate—often as little as 2% . It will definitely be cheaper than a personal loan or credit card (unless you can get a 0% discount, although those have their downsides too).
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The package of documents is minimal. Since you are a bank customer, passbook loans are usually easy to apply for, without all the fees and bureaucracy that come with personal loans.
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You still earn interest. The money you borrow is frozen in your account, meaning you won’t be able to access it until you repay the loan. But it will still earn interest, which helps not only maintain your savings plan, but also cover the overall cost of the loan—at least you’ll get some money back.
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You are building credit. If you have a bad credit score, a passbook loan is a good way to increase your credit because it is similar to a secured credit card. Your credit score won’t matter because you’re securing the loan with money the bank already has, so there’s zero risk for them, but repaying the loan on time will likely improve your credit score. However, not all banks report passbook loans to the credit bureaus, so you should check before assuming anything.
If you can’t get credit from other sources because of your credit history, a passbook loan may be your best—and perhaps only—option to avoid depleting your savings to cover unexpected expenses.
Applying for a loan using a savings book is quite simple. All you need is a savings account or certificate of deposit (CD) account with sufficient funds to cover the loan amount. Most banks will loan you up to 90% (or even 100%) of your account balance as a passbook loan, and they often have flexible repayment terms that allow for prepayment, so you can get the loan as quickly as possible. possible.
Flaws
A savings book loan may not be suitable for everyone. There are some disadvantages to consider:
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The amount of money you can borrow is limited by how much you have in your savings account or CD. If you don’t have enough money in your savings account to borrow the amount you need, you’ll have to look for other loan options.
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If you borrow a large portion of your savings, you will lose access to that money. If another emergency expense comes up, you won’t be able to use your savings to pay for it, which could push you to take out additional (and possibly more predatory) debt.
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If you default on your loan, you won’t just suffer from a lower credit score and mounting debt—you’ll literally lose the savings you used to secure the loan.
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Even though the interest rates on savings book loans are low, it will still cost more than simply paying the bill with your savings.