Yes, You Can Loan Yourself Money. Here’s How

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If you have some money in savings, it’s an option you may decide to look into. 

You may reach a point where you need to borrow money, whether to fix up a car or travel to a wedding. And from there, you have options. You could charge the expense on your credit card and pay it off over time, but in doing so, you might rack up a lot of interest.

You could also apply for a personal loan if you need access to money. But if your credit score isn’t so great, you may be denied a personal loan. You’d also need to go through the process of researching different lenders and shopping around for rates. That can be time-consuming and potentially little stressful.

A better bet may be to just borrow the money you need from your own cash reserves. And if you have money in a savings account, you can take out what’s called a passbook loan.

But is a passbook loan the right choice for you? It depends.

How a passbook loan works

A passbook loan lets you use the money in your savings account as collateral for a loan through your bank. Let’s say you’re sitting on a $10,000 balance in your savings account and you need to borrow $3,000. You can apply for a passbook loan, and chances are, you’d get approved. Your bank would then effectively put a freeze on that $3,000 until you’ve paid it back.

The pros and cons of a passbook loan

You may be thinking, “What’s the point of taking out a passbook loan when I have the money sitting there in my own savings account?” Well, the upside of a passbook loan is that you’ll get to leave your savings intact. For some people, it can be demoralizing to have to take a massive withdrawal from savings, so a passbook loan lets you avoid that.

You’ll also generally face a low interest rate on a passbook loan. The reason? Your bank isn’t taking much risk by giving you that loan. If you don’t pay it back, the bank can simply access your money in your account to get repaid.

On the other hand, when you take out a passbook loan, the equivalent amount of funds are basically frozen in your savings account, so you can’t use them. So while you’re not withdrawing from your savings, you’re also cutting off access to some of your money for a period of time.

Also, passbook loans charge interest. And to some degree, paying interest doesn’t make sense when you have the money in your account you can just withdraw.

Is a passbook loan right for you?

If you need money and are afraid to raid your savings, a passbook loan may not be such a great solution — because while you’re not taking cash out of your savings, you’re putting yourself in a situation where you can’t use it.

That said, a passbook loan may be a good bet if you’re trying to build up your credit score, or establish a credit history. When you pay your passbook loan on time, those payments will count as positive activity on your credit report, which could lead to a higher score.

It’s similar to a secured credit card, where you put down a deposit that’s equal to your spending limit and charge expenses against that limit. You’re not really gaining buyer power, but you’re helping yourself build credit. And there can be a lot of value in that.

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