Passbook Loan

Sure, we’ve got a savings account. It’s a good savings account, too: we’ve been putting money into it every two weeks like clockwork ever since we got our first job in high school, and now, we’ve got almost $20 grand in there. We’re proud of how much we’ve been able to save, and we do not want to spend one red cent of it. Ever.

Buuuut we also really want a 100-inch 4K Ultra HD TV, and last we checked, the one we’ve got our eye on costs about $10,000. Is it worth spending half of our hard-earned savings on a television? We think not. So instead, we’re going to see if our bank will offer us a passbook loan.

A “passbook loan” is a loan that uses our own savings account as collateral, and it tends to come with a lower interest rate than standard personal loans. And here’s a little added bonus: even though part of it’s been put up as collateral, our entire savings account balance still earns interest while we’re paying back our loan. Banks that offer passbook loans—and not all of them do—usually have rules about how much they’ll lend. Some banks will lend up to 100% of what’s in our savings account, but others will only lend up to 50%.

There are some drawbacks to going the passbook loan route, though. For one, we can’t access or use the money in the account that we’ve offered as collateral. In our example, even though our account balance is $20k, we’ve got $10k of that up as collateral, so we can’t access or use more than the other $10,000 until we start paying back the loan. But once we do, that money becomes available as well (i.e., if we pay off $1,000 of the loan, we now have access to $11,000). And second, when we take out a standard personal loan and then pay it back on time, it helps our credit score. That’s not always the case with passbook loans, because banks don’t always report them to the credit bureaus. And third, if something crazy happens and we end up defaulting on the loan, the bank’s going to take what they’re owed out of our account. If we’ve borrowed 100% of the value of our account and we default, they’ll straight-up close our account and keep the money, so it’s probably wise to avoid doing this unless (a) we’ve got another savings account somewhere that can cover our expenses if things go sideways, or (b) we know there is absolutely no way we’re going to default on the loan.