CD Loans: How to Borrow Against Your Certificate of Deposit

A CD loan could be a good option, but be aware of the terms.

Certificates of deposit are among the most secure investments on the market. Because they are insured by the federal government and typically have a higher interest rate than a traditional savings account, CDs are generally considered a good step toward investing in your financial future.

One of the drawbacks to investing your money in a certificate of deposit, however, is that your money can be tied up for an extended period while you wait for the CD to mature — for one year, three years, five years or even 10 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.

Can You Borrow Against a CD?

Even though you might not want to withdraw from your CD, there are other ways to have your money work for you if you do need cash quickly. For instance, it’s possible to use your CD as collateral for a term loan.

Some banks will allow you to borrow against a CD loan as long as you have the money on deposit at that financial institution. Typically, a financial institution can lend up to 100 percent of the value of your CD principal, and the length of the loan can be as long as the term of the CD.

Talk to your bank about the details before you sign anything and always try to only take out what you need — don’t take the entire amount offered just because you can. You still have to pay it back.

Learn More: What Is a Certificate of Deposit?

Should You Take Out a CD Loan?

It might seem counterintuitive to take out an interest-bearing loan against an interest-bearing CD, but 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 could help you rebuild credit with the three credit bureaus.

Another reason to take out a loan against a CD is if you need your money in a hurry. Banks like Wells Fargo can approve loans against a CD within hours and provide you with the funds on the same or following business day.

CD Loan Fees and Costs

On the downside, it’s unlikely that your loan interest will be less than your CD interest. Typically, CD loan rates are higher than the yield on a CD.

At Wells Fargo, for example, loans collateralized by a CD start at an interest rate of about 8.62 percent. Additionally, Wells Fargo charges a one-time $75 origination fee. Shop around, because other institutions might charge lower rates.

Taking out a loan on a certificate of deposit could still be worth it if you have a high-interest CD that bears substantial penalties for early withdrawal. Additionally, even on secured loans — such as loans you take out against your CD — you can usually score a lower interest rate if you have a high credit score.

Related: Complete Certificate of Deposit Guide

How to Take Out a CD Loan

Borrowing against a CD is usually a straightforward process. You’ll even continue to earn interest on the CD you own. Here are the steps to borrow against a CD:

  1. Open an account at a bank or other financial institution.
  2. Purchase a CD.
  3. Inform a banker that you wish to take out a CD-secured loan.
  4. Examine the rates and terms of a loan against a certificate of deposit, including all fees.
  5. Take out the loan, and receive your money.

Note that the first two steps do not apply if you already own a CD.

Read This: Why the 10-Year CD Might Be the Worst Bank Product Ever

Borrowing against your CD can be a viable option. To find out more, talk to your financial institution about what it can do for you, or check out other current CD rates that are available.

John Csiszar and Jose Vazquez contributed to the reporting for this article.