Matt Webber is an experienced personal finance writer, researcher, and editor. He has published widely on personal finance, marketing, and the impact of technology on contemporary arts and culture.
If you have a certificate of deposit (CD) from a bank or credit union, you may be able to use it as collateral to borrow money. This type of loan is called a CD-secured loan and it can be a good way to borrow in an emergency. However, you risk losing your CD if you fall behind on your loan payments. In this article, we’ll look at what a CD-secured loan is and help you decide if one is right for you.
When you buy a CD, you agree to leave your money with issuing bank or credit union for a set length of time, ranging from a few months to a number of years. In exchange, the issuer promises to pay a guaranteed rate of interest on your money that's typically higher than you could get on a regular savings account.
Because CDs offer that guaranteed return—and because most are insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA)—they are considered one of the safest investments around. However, a CD can be problematic if you need to get your money out before its term comes to an end.
While you can usually cash in or withdraw money from a CD prematurely, that typically triggers an early withdrawal penalty, sometimes a hefty one. An alternative is to take out a personal loan from a bank or credit union, using the money in your CD as collateral. A loan of this type is called a CD-secured loan or, more simply, a CD loan.
For banks and credit unions, CD-secured loans are a very low-risk proposition, so they can charge relatively low interest rates. However, if you can't pay back the loan, they will take your CD.
If you default on a CD-secured loan, the bank or credit union will not only withdraw money from your CD to cover your loan payments but might charge you an early-withdrawal penalty.
CD-secured loans can be a good way to borrow if you have sudden emergency expenses. They can also help you build a solid credit history. However, they are not without risks.
A CD-secured loan may not be your only option. These alternatives are worth considering if you don't have (or don't want to buy) a CD or if you have a low credit score:
CD-secured loans are most appropriate for people who need to borrow money, don't have other savings to tap (or to use as collateral), and wouldn't qualify for an unsecured personal loan.
Yes. Your payments on the loan will be reported to the credit agencies, so taking out a CD-secured loan (and paying it back on time) can be a way to build up your credit score.
Both a CD-secured loan and a credit-builder loan can help you establish good credit, but they work differently. With a CD-secured loan, you deposit money in a CD and use it as collateral to borrow against. With a typical credit-builder loan, a bank or credit union will lend you the money to put in your CD (or other savings account). As you make loan payments, the lender will report them to the credit bureaus. Once you've paid off the loan, the money is yours to keep.
CD-secured loans are a way of borrowing money against a certificate of deposit (CD) and can be an attractive alternative to cashing in the CD and paying an early-withdrawal penalty. CD loans generally have low interest rates because they are low-risk for lenders. They are also available to people with poor credit or no credit history and can help them build a good credit score. However, borrowers who are unable to pay the loan back could lose part or all of their CDs.
U.S. Securities and Exchange Commission. "Certificates of Deposit."
Experian. "How Secured Loans Can Help Your Credit."
Certificate of Deposits (CDs)
Certificate of Deposits (CDs)
Certificate of Deposits (CDs)
Certificate of Deposits (CDs)
Certificate of Deposits (CDs)
Certificate of Deposits (CDs)
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