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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, or 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.
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