What is a CD loan?


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If you have a certificate of deposit, you might qualify for a secure loan to get the cash you need.

CD-secured loans are a great way to score lower interest rates on a personal loan. With the certificate of deposit acting as the collateral for the loan, lenders normally offer better APRs because even if someone defaults on a CD loan, the lender can recoup its losses by way of the CD. However, it’s important to understand that when you back a loan with a CD, you risk losing that certificate should you fail to make payments.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

How does a CD secured loan work?

Some type of collateral typically backs a secured loan. For example, if you take out a mortgage to buy a new house, the house serves as collateral. Car loans work the same way; the automobile for which you obtain a loan becomes the collateral to secure the debt. When a borrower defaults on a secure loan, the lender can seize the collateral to cover the outstanding debt, which is why secured loans pose lower risks for banks and credit unions.

With a CD-secured loan, your certificate of deposit acts as collateral. CD loans allow you to retain your investment and get the additional cash you need. CD-secured loans are personal loans, which means you can use the money for a variety of expenses.

Advantages of a CD loan

  • When you apply for a CD loan with a bank or credit union that holds your CD, you can often get loan approval quickly, sometimes within hours, and receive funds within a day or two.
  • CD loan rates are often much lower than unsecured loan rates.
  • CD-secured loans often have fixed interest rates, so you’ll pay the same amount each month.
  • Your CD continues to earn interest throughout the life of the loan.
  • Lenders allow you to use funds the way you choose.
  • Banks and credit unions usually offer generous terms. In fact, some banks allow you to repay funds for up to 10 years.
  • Borrowers with poor credit often qualify for CD-secured loans.

Disadvantages of a CD loan

  • Not all banks and credit unions offer CD-secured loans.
  • Typically, you must already have a CD to qualify.
  • Lenders may require an origination fee or prepayment fee for paying off the loan before the end of the term.
  • You cannot cash out your CD until after you’ve paid off the loan.

Does a CD loan build credit?

The short answer is yes. With its low risk and low interest rate, a CD loan can offer the best route if it’s your only option for establishing or rebuilding credit. However, you don’t have to pay interest to improve your credit score; you can accomplish your goal by getting a credit card, charging one small expense each month and paying off the balance in full and on time.

Using a CD-secured personal loan to improve your credit score will work only if you make the payments in full and on time. Even though the lender can seize your CD if you default, it will still report your delinquency to the credit bureaus, Experian, Equifax and TransUnion.

Establishing and rebuilding credit are the most common reasons consumers take out these loans, but they also are a way to keep your investments intact when you need extra cash.

You won’t be able to use that money while it’s acting as loan collateral, but it will become available to you again once you’ve paid off the loan. If you pay off the loan according to the terms, you won’t lose any of your investment, but you will have to pay interest on the CD-backed loan. If you have a hard time building up savings, a CD-secured personal loan can be a good option.

A CD-secured loan is also a good alternative to an unsecured personal loan because you can get a better rate. In the current market, interest rates on personal loans start at around 5.7%, but rates on unsecured loans can run as high as 36%.

While establishing or improving credit are the most common reasons for taking out a CD-secured loan, keep in mind that the lender can seize your investment if you default on the loan. If that happens, you could end up losing your CD and damaging your credit, rather than improving it. Never consider a CD-secured loan if you are facing a job loss or expense that could lead to financial instability, such as a major health crisis. In those cases, using your investments might make better financial sense.

Should I get a CD secured loan?

Well, it depends. If you just want to build or repair your credit, a CD loan might be a good way to accomplish your goal. If you just graduated from college, or are starting a family, a CD-secured loan might be a great option for building credit to buy your first house. But remember, you can accomplish the same goal with a credit card, making small, manageable purchases, which you can easily pay off on time.

If you have a long credit history, with a good credit score, a CD-secured loan can enable you to borrow a large amount of money at a low interest rate. Since CD loans are personal loans, you can use the money for many different reasons such as for emergency expenses, major purchases or remodeling your home.

Alternatives to CD loans

If your bank does not offer CD-secured loans, don’t worry, because several other options may meet your needs.

Unsecured loans

If you have an extensive record of good credit, consider taking out an unsecured loan. Common types of unsecured loans include credit cards, personal loans and student loans. Qualifying for an unsecured loan depends on your creditworthiness and your ability to repay the loan according to its terms. Since unsecured loans don’t require collateral, the lender will need to verify that you have reliable and sufficient income to make timely payments throughout the life of the loan.

Unsecured loans require you to have a high credit score, since they pose a higher risk for lenders. Typically, unsecured loans have higher interest rates, which make them less attractive to many borrowers.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Savings-secured loans

With a savings-secured loan, you pledge your funds from your savings account as collateral. Like CD loans, savings-secured loans typically offer more favorable interest rates than unsecured loans. Savings-secured loans often feature fixed-rate terms, enabling you to make the same monthly payment throughout the life of the loan. Since your own funds back the loan, banks often offer same-day approval.

Savings-secured loans give you the opportunity to build or repair your credit. Some banks and credit unions do not charge application or prepayment fees with savings secured loans.

Secure credit cards

If you do not need a specific amount of money and simply need to build or repair your credit, a secured credit card offers great benefits. To get one, you must make a cash deposit, which establishes the limit you can spend using the card. For instance, if you deposit $1,000, you can use the card to spend up to $1,000. Depending on the terms of the card, the lender may extend a certain credit limit over time, if you establish a good credit track record.

The bottom line

CD-secured loans can save the day, especially if lenders have turned you down for an unsecured personal loan. They offer a great way to build or repair credit, while providing funds with low interest rates and generous terms. But CD loans aren’t just for people with credit challenges. You can also use them to avoid dipping into your savings for extra cash. Best of all, you can use your funds for virtually anything you need, from building an addition to your home to taking a fabulous vacation to sending your high school graduate off to college. Ease of qualification, fast funding and flexible terms make CD-secured loans a winner for all types of borrowers.