What Is a Passbook Loan?
A passbook loan is a personal loan made to a savings-account holder by the custodial bank, which uses the balance of the savings account as collateral.
How a Passbook Loan Works
With a passbook loan, the savings-account holder continues to earn interest on the savings account, including on the amount borrowed. As the loan is repaid, the account holder gains access to those funds. Terms and conditions vary considerably, with some lenders lending only as much as 50% of the savings account balance and others willing to lend up to 100%.
Passbook loans are considered low-risk transactions for the lender due to the accessibility of the collateral. 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.
[Important: A passbook loan uses the balance of a savings account as collateral, which makes it of low risk for a lender.]