What Is a CD Loan?

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Some banks will allow you to borrow against a CD, without breaking the CD deposit, and use it as collateral for a term loan. You can usually do this as long as your certificate of deposit is at that same financial institution. Typically, a financial institution can lend up to 100% of the value of your CD principal, and the length of the loan can be as long as the term of the CD.

A CD loan allows for speedy access to cash while your savings continue earning interest. However, borrowing limits and fees might make withdrawing funds a more affordable option.

How Does a CD-Secured Loan Work?

A secured CD loan allows you to use a certificate of deposit as collateral when borrowing money. Because the loan is backed by your funds, it usually comes with lower interest rates than an unsecured personal loan. Here’s how the process works.

1. Loan Approval

Secured loans may have less stringent credit requirements than unsecured loans, which means that borrowers with lower credit scores may find it easier to be approved. Once you apply for a secured CD loan, the bank will verify your CD balance to determine how much you can borrow, which is usually up to a certain percentage of the CD’s value and never more than that.

2. Interest Rates and Terms

Because the loan is backed by your CD, lenders offer lower interest rates to borrowers than they do for unsecured loans. However, the rate will still be higher than what your CD earns. Banks often set rates by adding a percentage — typically 2% to 3% — above the CD’s annual percentage yield. So if your CD has a 1.54% APY, your CD loan interest rate could be between 3.54%- 4.54% or higher, depending on your creditworthiness.

Your CD loan’s term is equal to the remaining term on your CD, so if you have a 12-month CD that you opened four months prior, the bank will only make a loan for eight months.

3. Collateralizing the CD

When you take out a CD loan, the bank places a hold on your CD balance that’s equal to the loan amount. While the loan is in repayment status, you won’t be able to withdraw or access that portion of the funds. However, the CD will continue to earn interest during this period.

4. Repayment

CD loans are repaid in fixed monthly installments. If you make all payments on time, you’ll regain full access to your CD once the loan is paid off. However, missed payments could result in the bank seizing your CD funds to cover the balance you still owe.

Benefits of CD Loans

It might seem counterintuitive to take out an interest-bearing loan against an interest-bearing CD, but there can be some advantages.

One advantage 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 your credit with the three credit bureaus.

Another advantage of a CD loan is having quick access to funds. Banks may be able to approve loans against a CD quickly and provide you with the funds within one to two business days.

Also, the interest rate you’re offered by the lender may be lower than other types of loans you’re considering, such as overdraft fees from a checking account. Additionally, you can still earn interest on your CD when you take out the loan.

Drawbacks of CD Loans

You could face upfront fees and be limited to a loan equal to a certain percentage, such as 85% to 90% of your CD’s balance, if you get a CD loan.

Also, cashing out your CD might be cheaper than getting a CD loan due to the overall cost of the loan versus the withdrawal penalty for withdrawing the funds before maturity.

Finally, you won’t be able to liquidate your CD as long as you have a loan against it. If you default, you risk losing the money in your CD.

How To Apply for a CD Loan in 4 Steps

Borrowing against a CD is usually a straightforward process, but if you need something more flexible, a savings account could be a better option. Here are the steps:

1. Check to see if your bank or credit union offers CD loans.
2. Inform a banker at the institution where your CD is held that you wish to take out a CD-secured loan.
3. Examine the rates and terms of a loan against a certificate of deposit, including all fees.
4. Apply for the loan and receive your money upon approval.

CD Loans vs. Other Secured Loans

If your bank or credit union doesn’t offer CD loans, here are some other secured loan options.

Home Equity Loans

Home equity loans allow you to borrow against the equity in your home — the amount you owe versus the market value — and use your home as collateral. Because the value of the collateral is significant, banks often offer larger loan amounts and longer repayment terms than they would on a CD loan. However, the risk is much greater: if you fail to repay the loan, you could lose your home.

Secured Credit Cards

A secured credit card requires you to make a cash deposit that serves as collateral and also the amount of your credit line. Secured credit cards are used for building or rebuilding credit rather than as a way to access cash, so a CD loan may be a better fit if a loan is your primary goal.

Auto Secured Loans

Auto loans are another type of secured loan, where the car you own serves as collateral. Auto loans may allow for higher borrowing amounts than a CD, but they also carry risk. Just like a home equity loan, if you fail to make payments, your lender can repossess your property.

Alternatives to CD Lending

If you’re not eligible for a CD loan or the loan terms aren’t satisfactory, here are some alternatives to consider.

Personal Line of Credit

Some banks offer personal lines of credit, which are open-ended and allow you to borrow up to a predetermined amount. The advantage is that you can use the funds for anything you want. To get the best interest rates on a personal line of credit, you’ll need good to excellent credit.

Peer-to-Peer Loan

If you have fair or poor credit, you may want to consider a P2P loan. Individual investors fund these personal loans and often offer better interest rates than you’ll find through traditional lending sources.

Life Insurance Policy Loan

If you have a permanent life insurance policy, you might be able to access some of the cash using the life insurance policy as collateral. These types of loans often have flexible repayment policies, and, in some instances, you might opt not to pay back the loan, which means the balance would be deducted from the benefit amount upon your death.

Retirement Plan Loan

If you have an employer-sponsored plan, such as a 401(k), you may be able to take a loan from your balance. This can be a good option if your credit prevents you from getting a loan from other sources because retirement plan loans don’t require a credit check.

You will, however, have to pay back the loan with interest within five years, and the interest will be credited to your retirement account. Even so, removing the money from your account will not allow it to grow from compounded interest, so you will lose out on those earnings.

Is a CD Loan Right for You?

A CD loan can be a good way to access cash, especially because you can do it without withdrawing funds from the CD and incurring a withdrawal penalty. Interest rates on CD loans are often lower than what banks offer on a secured loan.

Additionally, CD loans can help you build your credit if you make timely payments.

Drawbacks may be an issue, however, including only being able to borrow up to your CD balance, fees that might make it more expensive than withdrawing early and no access to your CD funds until you pay off the loan.

Consider all of the pros and cons before making a decision. Cashing out your CD or opting for an alternative loan may be a better choice.

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.

Jami Young, John Csiszar, Jami Farkasand Jose Vazquezcontributed to the reporting for this article.

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