Passbook Loan

DEFINITION of 'Passbook Loan'

A personal loan extended to a savings-account holder by the custodial bank. Passbook loans use the balance of the savings account as collateral for the loan. The amount of the loan therefore cannot exceed the savings-account balance.

BREAKING DOWN 'Passbook Loan'

Passbook loans are considered low-risk transactions due to the accessibility of their collateral to the lender. The borrower must hand over the passbook to the bank until the loan is repaid. The bank can also simply place a hold on the funds in the savings account up to the amount of the loan.