credit union

Dear Liz: My son ran up a lot of credit card debt and it got to the point where he could barely pay even the interest, which was exorbitant. He asked me for a loan, but I wanted something to formalize the process. I tried cosigning on a loan with him, but found that, as a retired person, my income is not enough.

Meanwhile, I have enough savings, and it occurred to me that perhaps I could use that money as collateral. Eventually, we found a credit union that would loan money as long as you had enough funds in a savings account. I put $11,000 into a savings account and my son was able to get a loan for $10,000. The interest rate is about 4%, well below the 12-18% we were quoted on personal loans from conventional banks and online lenders.

I had never heard of this type of loan before, and it might be a nice option for people who want to help their kids, but want to formalize the loan rather than just expecting them to pay it back on their own, which can become messy. Furthermore, my son’s payments will be reported to the credit bureaus, so it will boost his credit score.

Answer: Thanks for sharing your experience. Many credit unions offer what’s known as “share secured” or “deposit secured” loans, where a savings account serves as collateral for a loan. While the funds in the account are effectively frozen until the loan is paid off, the account still earns interest, offsetting the total cost of the loan.

When people don’t have enough funds of their own, using a parent’s account may be a possibility. People in a position to help an adult child this way should understand the potential risks, such as damage to the parent’s credit scores if the child misses a payment and the possibility of losing the money if the child defaults. The parent should also find out if it’s possible to be alerted if a payment is overdue, since that could give them time to make the payment and avoid credit damage.