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 can be a good way to borrow in an emergency. However, you risk losing your CD if you fall behind on your loan repayments. In this article, we’ll take a look at what a CD-secured loan is and help you decide if it’s right for you.
Key points to remember
- CD-secured loans allow you to borrow money using a certificate of deposit (CD) as collateral.
- These loans generally offer low interest rates as they pose little risk to the lenders.
- CD-secured loans are also available for people with low credit scores or limited credit histories, who might not qualify for other types of loans.
How CD-backed loans work
When you buy a CD, you agree to leave your money with the issuing bank or credit union for a set period of time, ranging from a few months to several years. In exchange, the issuer promises to pay a guaranteed rate of interest on your money which is usually higher than what you could get in a regular savings account.
Because CDs offer this guaranteed return—and because most are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration—they are considered one of the safest investments. However, a CD can present a problem if you need to withdraw your money before the end of its term.
Although you can usually cash in or withdraw money from a CD prematurely, doing so usually triggers a sometimes hefty early withdrawal penalty. An alternative is to take out a personal loan from a bank or credit union, using the money from 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-backed loans are a very low-risk proposition, so they can charge relatively low interest rates. However, if you cannot repay the loan, they will take your CD.
If you are unable to obtain a CD-backed loan, the bank or credit union will not only withdraw money from your CD to cover your loan payments, but you may also have to pay an early withdrawal penalty. .
Advantages and Disadvantages of CD Secured Loans
CD-backed loans can be a good way to borrow if you have sudden emergency expenses. They can also help you establish a strong credit history. However, they are not without risks.
Advantages of CD-backed loans
- Low interest rates. Since CD-backed loans pose very little risk to lenders, the interest rates they charge are usually quite low.
- Long repayment periods. Banks and credit unions may offer long repayment periods on CD-backed loans, allowing you to repay the loan over 10 years in some cases.
- Build your credit score. Borrowers with bad credit or little credit history may be able to qualify for this type of loan. This is because it is based on their collateral (the CD), not their personal creditworthiness. Repaying the loan on time will also help them establish a good credit history and improve their credit score.
Disadvantages of CD-backed loans
- You need a CD. Obviously, a CD secured loan is not an option unless you already have a CD or are ready to open one. This means tying up your money in an investment with a relatively low rate of return.
- Low Availability. Not all banks and credit unions offer CD-backed loans, so you may have to shop around a bit to find one.
- No access to CD funds. Because your CD is used as collateral for your loan, you won’t have access to this money until the loan is paid off.
Alternatives to a CD-backed loan
A CD-backed loan may not be your only option. These alternatives may be worth considering if you don’t have (or don’t want to buy) a CD or have a low credit score:
- A loan secured by shares or passbook. These loans use your savings account as collateral and, like CD-backed loans, tend to offer competitive interest rates. This way, you don’t have to pull out a CD to borrow against your savings.
- A short-term personal loan. If you can be approved for a short time Personal loan with a bank or credit union, you may find that you can access more money than with a secured loan. Just make sure to repay the loan on time or you could hurt your credit score.
- A secure credit card. This is a special type of credit card for people with bad credit or who do not yet have a credit history. You make a deposit, which then serves as a credit limit. As you charge for purchases and make payments on time, your credit score should improve, making you eligible for a regular unsecured credit card and other types of loans. If you don’t have a CD but have some cash that you can leave on deposit with a credit card issuer, this might be an option.
Who is the CD-backed loan suitable for?
CD-backed loans are most suitable for people who need to borrow money, have no other savings to tap into (or use as collateral), and would not qualify for a loan. unsecured staff.
Does a CD secured loan create credit?
Yes. Your payments on the loan will be reported to credit reporting agencies, so taking out a CD-backed loan (and paying it back on time) can be a way to boost your credit score.
Is a CD secured loan the same as a credit builder loan?
A CD-secured loan and a credit-building loan can both help you build good credit, but they work differently. With a CD-backed loan, you deposit money on a CD and use it as collateral to borrow. With a typical credit loan, a bank or credit union will lend you the money to put in your CD (or other savings account). As you make repayments, the lender will report them to the credit bureaus. Once you have repaid the loan, the money is yours.
CD-backed loans are a way to borrow 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 pose little risk to lenders. They are also available for people with bad credit or no credit history and can help them establish a good credit rating. However, borrowers who are unable to repay the loan could lose some or all of their CD.