With unemployment numbers continuing to rise, the need for emergency cash for household and living expenses is becoming more frequent. Backed by bank account funds, savings account loans are a type of collateral loan. They offer a viable alternative to disrupting the funds in an interest-bearing ira or being penalized for early withdrawal.
Instant Money
Today’s ‘passbook’ lenders move fast; an application takes a few minutes and is available online. If they are not the lender, it is disbursed to a network of affiliated lenders, and within minutes or hours, the individual has an approval or rejection. When backed by a savings account, the lender will place a hold on the funds in the amount of the loan, and has the first right to the money.
Once a loan has been approved, the money is transferred directly to the borrower’s account and the clock on repaying starts.
Types of Collateral
The term savings account loan can be deceptive, as lenders will accept any form of paper assets, real estate, or appraised valuables. The concept is the same, however, all or part of an asset is put up in return for fast cash. Loans typically have a short term repayment period, and large relative fees. Borrowers stand to lose the entire asset if they default on their loan, as the lender can use their right of offset to garnish the account or demand restitution through the sale of the asset.
By placing material savings in a bank account up for collateral, the individual is putting the amount borrowed or greater on hold until the loan is repaid. In this way, the lender is guaranteed a return on their loan, and the borrower prevents further financial complications for themselves.
Cautionary Notes
A saving accounts loan is a useful emergency resource when immediate cash reserves are depleted and basic necessities are needed. However, the borrower risks defaulting and creating more debt without a job or anticipated funds to pay it back. Before getting a short term loan, it may be useful to take out a loan from friends and family, use or open a credit card, or borrow against a 401k plan.
The benefits of a savings loan may outweigh the penalties of using retirement savings, however. If the loan is a small amount such as $1,000, the amount due with fees the following month may only be $1250. An individual who knows they will have the money to repay the loan is paying a small fee to avoid a late payment on the mortgage or rent, on an auto loan, or to keep the lights in the house on.
Borrowing from retirement savings, such as an ira, is simply considered an early withdrawal. The IRS taxes, penalizes or does both when money is taken out of an ira early. At a tax rate of 20% and a penalty of 10%, this becomes more expensive than the short term loan.
For emergencies, savings account loans are a useful resource. Search for the best rates, and always have the means to pay it back before applying.
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