Getting a CD-secured loan
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Dear Dr. Don,
I would like to take out a loan against my
CDs. Which banks do this and what is the cost? -- Greg Gravitas
Dear
Greg,
Certificate of deposit (CD) secured loans are taken out at
the bank where you hold the CD. Since you can't cash in the
CD without the bank knowing about it, it is perfect collateral
for the loan. So if you already have the deposits, you should
talk to that bank about a CD secured loan. The lender will
typically make a loan for up to 90 percent to 100 percent
of the value of the deposit and the loan term will be for
no longer than the term of the CD, although both may be renewed/rolled
over.
Banks and credit unions that market this loan talk about
using it to build a credit history. Like a secured credit
card, you're borrowing against money on deposit. For the payment
history to help your credit score, however, the bank has to
report it to the credit bureaus.
The financial institutions may not require any
payments on the loan until maturity giving you maximum flexibility.
Others may bill it as an interest-only loan until its maturity
date. In general, these loans are priced 2 percent to 3 percent
over the rate that you are earning on your CD.
CD secured loans can be a good source of funds if you have
a poor credit history because you'll get a better rate from
the bank than you could ever hope to get on an unsecured loan
with a poor credit history. Still you have to look at the
cost of paying 2 percent to 3 percent more on the loan than
you are earning on your deposit.
You have to ask yourself what the goal is in getting a CD
secured loan. You could incur the early withdrawal penalties,
cash in the CDs and avoid the interest expense on the loan
if you need the money but that won't do anything toward building
a credit history.
This Bankrate
feature has more information about CD secured loans.
-- Posted: March 2, 2005
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