 Using CD to secure a loan
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 Dear
Dr. Don,
I have some money I would like to put in a CD. Can I borrow against it?
-- Collateral Credit
 Dear
Collateral,
Yes, there are banks and credit unions that will give you a loan
collateralized by money you have on deposit at that financial institution.
Typically the financial institution will lend up to 95 percent of
the value of the deposit, and the length of the loan will match
the remaining term of the CD.
If
you've got bad credit, this is an alternative to a secured credit card. If your
intent is to use the payment history to improve your credit, then you need to
make sure the lender will report that payment history to the credit bureaus.
Both the deposit and the loan have to be with the
same financial institution. If you already have the CD, then
talk to that banker about getting a secured loan. If you're
shopping for the best combination then you'll compare the yield
on the CD to the interest rate on the loan. It's typical for the
loan rate to be 2 percent to 3 percent above the yield on the CD.
I'm not a big fan of CD loans unless the borrower
has a compelling reason to use this type of financing, such as bad
credit or a high-interest CD with substantial early withdrawal penalties. The
Bankrate feature, "Borrow
against your CD for a low-cost loan," explains the loans
in greater depth.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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