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?