What are the Risks of Certificate-Secured Loans?

A certificate-secured loan requires funds be placed on hold with a lender as collateral for the loan amount. The funds yield a dividend. This percentage dividend can effectively be subtracted from the interest rate of the loan, making this option fairly inexpensive for borrowers. This is an attractive alternative to securing a loan with an asset like a home or car, especially if the amount you are seeking is relatively low. However, these secured loans have their own unique set of risks. 

Insolvency of the Lender

Whenever you place funds on deposit with the lender, you run the risk of the lender going out of business if insolvent. This is a relatively low risk, but it should be considered before you place savings in an account or certificate. 

Default and Seizure

If you default on any secured loan, your collateral will be seized. You stand to lose the principal amount you deposited with a certificate-secured loan. 

Adjustable Rates

Your loan contract should set the rates on both your certificate on deposit as well as the interest rate of your loan. Ensuring both of these rates are fixed will help you value the true cost of financing. 

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