What Is a Passbook Loan?

By Melissa Brock. August 20, 2024 · 9 minute read

This content may include information about products, features, and/or services that SoFi does not provide and is intended to be educational in nature.

What Is a Passbook Loan?

A passbook loan is a loan that allows you to borrow against the money you have in your savings account. In other words, your savings serve as collateral for the loan.

While you will likely have to pay interest when borrowing money in this way (which you wouldn’t have to do if you used your savings directly), a passbook loan can help you build credit if your financial institution reports the activity to the credit bureaus and you manage the loan well. Passbook loans may also be a valuable financial tool if you’re having trouble securing a personal loan or find their interest rates to be higher than you can afford.

Keep reading for all the details about how passbook loans work, plus their pros and cons.

Understanding Passbook Loans

Here, learn more about the definition and history of passbook loans as well as how they usually work.

Definition and Historical Background

Passbook loans (often called share-secured or savings-secured loans) are a way to borrow funds, typically at a lower interest rate, by using your savings as collateral.

Passbooks are physical books that record a bank account holder’s transactions. These passport-sized books originated in the 18th century; bank tellers and postmasters could record account transactions in them. For example, a bank teller could write the date of a transaction, the amount deposited or withdrawn, and the amount of money available to the customer. In the late 20th century, bank statements began to make their appearance and replaced passbooks to a large degree. (For those who want them, however, passbook accounts are still available from some financial institutions and can provide a customer with a classic booklet to track transactions.)

A passbook loan borrows from the name of these old-fashioned books. With passbook loans, you use your savings account, held at the same institution, as collateral for a loan, and you may pay a relatively low interest rate. Putting the money in your account up for collateral, however, means your lender can seize that cash if you default on your loan payments.

How Passbook Loans Work

Here’s how a passbook loan works:

•   First, you’ll have to find a bank or lending institution that offers passbook loans. Most banks don’t offer them, so you might consider checking at a credit union.

•   Once you find a potential lender and establish a savings account or a certificate of deposit (CD) there, the financial institution will usually let you borrow up to 90% to 100% of the money in your savings account. For example, if you have $20,000 in your savings account, you may be able to borrow $18,000 to $20,000. Check with the lender to learn the exact amount.

•   Once you receive the loan from your financial institution, it’s important to note that you can’t access your savings. The financial institution might put a hold on your account, or you might have to hand over your savings passbook until the loan is repaid.

•   As you repay your loan with interest, your lender will usually release the amount you repay from your withheld savings.

•   Your payments may be reported to the national credit bureaus, but check with your lender to be sure. Timely payments can help build your credit score, while making late payments on your passbook loan can damage your score.

Obtaining a Passbook Loan

Next, take a closer look at the usual eligibility and requirements, interest rates, and repayment terms for passbook loans.

Eligibility and Requirements

You’ll need a funded savings account or certificate of deposit to be eligible for a passbook loan, and it’ll typically have to be held at the institution you plan to borrow from. These types of loans are usually easier to get and less risky to the lender because they use collateral to back them (unlike unsecured loans, which don’t require collateral).

Interest Rates and Repayment Terms

It’s important to understand passbook loan interest rates (the amount you repay in addition to the principal), particularly because you’re basically paying interest on your own money.

These loans can offer some of the lowest interest rates of any type of loan, likely because, since they are secured, they pose less risk to your financial institution. For instance, BankFive charges passbook loan rates of 3.00% to 3.50% APR (annual percentage rate) over the interest rate of the savings account used as collateral.

You repay the loan in regular, monthly installments over a specified period, such as three years.

Application Process

You’ll have to fill out an application for a passbook loan. Each bank or credit union has its own application. Simply request the application from your financial institution. Depending on the lender’s requirements, you may be able to complete the application online, in person, over the phone, or via mail.

You may find the paperwork simpler and shorter than what is required for other kinds of loans. That can reflect the fact that you are already a customer of the financial institution and that you are borrowing against your own money.

Advantages and Disadvantages of Passbook Loans

It’s important to consider the pros and cons of passbook loans before you pursue one.

Benefits of Passbook Loans

First, the upsides of passbook loans:

•   Lower interest rates: Passbook loans typically carry a lower interest rate than other types of loans, which means the amount you pay back (principal plus interest) could total less than what you’d pay for other types of loans.

•   Credit building: Passbook loans may help you build credit, provided your lender reports the loan activity to the credit bureaus and you make your payments on time.

•   Few approval requirements: You usually don’t have to meet as many approval requirements to get a passbook loan as you would with other types of loans. That’s because your savings account, typically at the same financial institution, serves as collateral.

Potential Drawbacks and Risks

Now, the downsides of passbook loans:

•   Credit may not improve: Though unlikely, your lender may not report your passbook loan payments to the credit bureaus. In that case, a passbook loan might not help you build your credit, even if you are meticulous about paying it back on time. It’s wise to check this point in advance. (Also, you must manage the debt responsibly to build credit if the lender does report your activity.)

•   Uses your account as collateral: If you fail to make your payments on your passbook loan, your financial institution can take the money from your savings account.

•   Cannot access your money while you borrow: You cannot access your savings account when you borrow money using a passbook loan. This can put you in a tricky situation if you need money immediately.

•   Paying the bank for your own funds: At a basic level, a passbook loan means you’re paying the bank to borrow your own money.

•   Restricted amount: In a best-case scenario, you can only borrow the amount you have in the bank. So if you have $3,000 in your savings account but are hoping to borrow $10,000 via a passbook loan to buy a car, you won’t be able to do so.

Alternatives to Consider

Passbook loans may not be the right fit for your situation, so you might consider these options instead.

•   Personal loans: Personal loans, which generally range between $1,000 to $50,000, are unsecured loans that come from a wide variety of financial institutions, including banks and credit unions. You can use them for any purpose, including home improvements, debt consolidation, and more. Personal loans may cost you more in interest compared to passbook loans, and repayment terms usually range from two to seven years.

However, you typically don’t need collateral for a personal loan, unless it’s a secured personal loan.

Use a personal loan calculator to learn more about how much a personal loan might cost you.

•   Credit-builder loans: If you have little to no credit, a credit-builder loan may help you improve your credit score. These loans, which usually range between $300 and $1,000, involve depositing money into a certificate of deposit (CD) or savings account, which the lender holds as collateral. You don’t receive a lump-sum disbursement upfront, as you do with many loans. Instead, you make fixed monthly payments toward the loan (principal plus interest). Your lender may release some of the borrowed funds when you make a monthly payment, or they might hold the full amount till you make the final payment. Interest and fees are usually deducted from the amount you receive. This activity is reported to credit bureaus and contribute to an uptick in your score.

•   Secured credit cards: You may want to consider a secured credit credit card instead of a passbook loan. A secured credit card is a credit card that requires a security deposit, which becomes your line of credit. If you don’t make your payments on time or default on your loan, your lender can take your deposit. However, using the credit card responsibly can help you build credit because your lender typically reports your payments to the three major credit-reporting agencies — Experian®, Equifax®, and TransUnion®.

Recommended: What Is the Average Interest Rate on a Personal Loan?

Using Passbook Loans for Different Purposes

There are many uses for funds borrowed via a passbook loan, such as:

•   Purchases, such as a new laptop

•   Expenses, like homeowners insurance or summer camp for the kids

•   Debt consolidation, such as paying off your credit card bill

•   Buying a car

•   Home improvement projects

•   Wedding costs

•   Medical or educational expenses

•   Vacations

Ultimately, you can use a passbook loan for whatever you want.

Future of Passbook Loans

Will passbook loans be part of the future financial landscape? Given all the other financial products currently available (such as the personal loans described above), consumers may not want to pay interest to borrow against their own savings.

Decline in Popularity

Passbook loans are not very common, having seen their popularity ebb over the years. Their usefulness is often limited to those who want to build their credit in this particular way or are seeking an especially low interest rate. If you find yourself in that situation, you may want to check with various lenders, especially credit unions, to see what’s available.

On the other hand, market data indicates that personal loans are gaining popularity.

The Takeaway

Passbook loans are a way of borrowing money against your savings, which can be useful for some people looking to build their credit. Ultimately, however, you end up paying a financial institution to borrow your own money with a passbook loan.

If you’re looking to access funds for debt consolidation, home improvement projects, a wedding, or other needs, you might want to consider a personal loan instead.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Are passbook loans still available today?

Yes, passbook loans are still available today. Not every lender offers them, so search online for options. You may find that credit unions are more likely to fund these loans.

Can I get a passbook loan without a savings account?

Typically, you need a savings account or a certificate of deposit (CD) account for a passbook loan, typically with the institution you intend to borrow from.

What happens if I default on a passbook loan?

If you default on a passbook loan, your lender could seize your savings (the loan’s collateral) to repay the delinquent balance. Defaulting on your loan can also hurt your credit score.


Photo credit: iStock/Jinda Noipho

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