Borrowing Against a Certificate of Deposit

Certificates of deposits (CDs) are among the most secure investments on the market. Since they are insured by the federal government, and have a slightly higher interest rate than a traditional savings account, they are generally considered a good step toward investing in your own financial security.

Disadvantages of Investing in a Certificate of Deposit (CD)

One of the drawbacks to investing your money in a certificate of deposit is that your money can be tied up for a long period of time while you wait for the CD to mature – for one year, three years, five years or even ten years. If the roof on your house collapses, or your child needs expensive dental work, you won’t be able to liquidate this asset without paying substantial closing penalties for early CD withdrawal.

Borrowing Against Your Certificate of Deposit

However, even though you may not want to withdraw your CD principal, there are other ways to have your money work for you if you do find yourself in financial straits. For instance, it is possible to use your CD as collateral for a loan. Some banks will give you a loan against your CD so long as you have the money on deposit at that financial institution. Typically, a financial institution can lend up to 95% of the value of your CD principal, and the length of the loan can be as long as the term on the CD.

It may seem counter-intuitive to take out an interest-bearing loan against an interest-bearing CD. However, there can be sound financial reasons for doing so. One reason might be to improve your credit score by making a series of on-time payments on a secured loan. If you establish a good payment history, taking out a loan against your CD can be a good alternative to obtaining a secured credit card, and will help improve your score with the three credit bureaus.

Also, although it is unlikely that your loan interest will be less than your CD interest (it is typical for a loan rate to be 2 to 3 percentage points higher than the yield on a CD), it may be worth it if you have a high-interest CD that bears substantial penalties for early withdrawal. Talk to your financial institution about what they are able to do for you, or check out our current cd rates.