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Borrow against your CD for a low-cost loan

Putting up your investments as collateral for a loan can be a dicey proposition. If you default, a portion or all of your investment is gone and it can be hard to recoup.

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But if you're reasonably certain repayment won't be a problem, borrowing against your certificate of deposit can be a flexible, low-cost way to get the loan you want.

Roberta Rohrman, branch manager at Crown Bank in Casselberry, Fla., says she wishes her bank sold more CD loans.

"It's the most secure loan you can have, and it maintains our good relationship with our customers. I feel we're serving the customer best. I like to see them keep that lump sum and not try to reaccumulate it again."

Since the CD is just used as collateral, it will continue to earn interest during the term of the loan. Interest on the loan usually will be 2 percent or 3 percent above the CD rate. That means you're getting a loan for 2 percent or 3 percent plus loan origination fees.

"Our CD loan rate depends on the dollar amount of the loan," says Lisa Moleski, loan operations manager at Capitol Credit Union in Austin, Texas. "Two percent above the CD rate if the loan amount is $3,000 or more, 3 percent for a loan below $3,000."

One caveat; don't try to use a CD from bank A to get a loan at bank B.

"We get calls all the time from people wanting to pledge other banks' CDs to us," says Bob Morgan, senior retail lending officer at Raymond James Bank in St. Petersburg, Fla. "Most banks are now in a mode where they'll only lend against their own CDs."

Most institutions will let you borrow up to 95 percent of the value of the CD. Some, such as Capitol Credit Union, let CD holders borrow 100 percent, but usually you'd need a really strong relationship with your institution to get that.

You may find institutions discouraging loans against CDs if the CD matures in less than one year. All institutions match the loan to the CD.

"If the CD is a one-year, the loan runs for one year," according to Jon Ingalls, vice president at Valley View bank in Overland Park, Kan. "Otherwise it gets out of kilter if the CD matures in six months and the loan is for 12 months."

Repayment options
You're likely to find a variety of repayment options. If you want to receive the full value of your CD at the end of the term, it's best to arrange to pay back principal and interest during the loan period.

Many banks will let you make either principal or interest payments, but you'll have to fork over a portion of the CD when the loan is due.

"Ours is structured as an interest-only payment," says Crown Bank's Rohrman. "Anything over and above pays down the principal. We send a bill once a month for just the interest."

If you do an interest-only loan and you don't want to lose a chunk of the CD when it matures, you can renew the CD and the loan.

While CD loans often can be structured as a line of credit, don't think of it as an endless source of credit, says Bob Morgan.

"Lenders may be generous with renewal but it's not meant to be an evergreen scenario. There needs to be some finality at some point. It's in the best interest of the borrower to have some targeted period where the loan is resolved."

If you're considering a CD loan, compare the overall cost of the loan aganst the withdrawal penalties the CD may carry.

"There's often an interest penalty that should be carefully compared to the net interest cost on the loan plus any origination fees involved in the CD loan," Morgan says. "Those fees will vary significantly by lender and by state. We pay the state of Florida a tax on every loan, including CD loans. Another state may not have that tax."

If you have a low-rate CD, you may fare better by cashing it. But if you have an older CD with a high rate, think carefully before redeeming.

CD loans can be a way to borrow money if your credit is slightly dented. Some institutions do credit checks; many don't. If you want to use a CD loan to polish your tarnished credit file, ask if the bank reports repayment of a CD loan to the credit bureaus.

Bankrate.com's corrections policy
-- Updated: Jan. 8, 2007
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