CD rates Blog

Finance Blogs » CD rates Blog » Can’t get a loan? A CD might help

Can’t get a loan? A CD might help

By Claes Bell ·
Monday, April 8, 2013
Posted: 5 pm ET

Certificates of deposit aren't much good for earning interest these days; the average 5-year CD rate is just .82 percent annually. But they may be good for something else: securing a loan.

Many banks and credit unions allow customers to use CDs as collateral for a loan up to a certain percentage of the CD's value. Securing a loan with a CD can help borrowers get a lower rate or qualify for a loan they may not otherwise be able to get. Rates for such loans may be quoted on a stand-alone basis or as a number of percentage points above a bank's annual yield on CDs.

While the best course of action is to keep a cushion in liquid savings accounts to cover unexpected expenses so you don't need a loan in the first place, if you do have an unexpected need for cash and don't want to incur an early withdrawal penalty or touch your savings, a CD-secured loan might be just the ticket. Just be sure you're not overpaying; it's possible to find loans for just 2 to 3 percentage points above CD yields at many credit unions, so you probably don't want to pay much more than that.

As an added bonus, many banks report CD-secured loans to the major credit bureaus, so taking one out may be a relatively cheap way to rebuild your credit rating after a few missteps. If that's your motivation for seeking out a CD-secured loan, though, you'll want to verify the record will make it onto your credit report before you apply.

What do you think? Would you ever consider taking out a loan secured by a CD? If you have, what was your experience?

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.