CD loans are secured personal loans where you borrow money from your certificate of deposit to pay for emergencies, debt consolidation or whatever else you need. This method of borrowing is only available to people who currently have a CD.

What is a certificate of deposit (CD)?

A certificate of deposit (CD) is offered by banks and credit unions and is similar to a savings account. It pays interest over a specific period of time, ranging from six months to five years. But unlike a regular savings account, if you withdraw the funds before the term you select ends, you may incur a steep penalty. This makes a CD more of a long-term savings vehicle than one designed for short-term gains.

If you open a CD with a three-year term, the funds must remain in the account for that amount of time. At the end of the three-year period, the CD matures and you can either withdraw the funds or renew the CD for another term and continue earning interest. You’ll typically have five to ten days to decide how to move forward once the CD matures. The CD may automatically renew if you fail to notify the bank or credit union of your intentions.

What is a CD-secured loan?

A CD loan is a type of personal loan that uses your certificate of deposit to secure the loan funds. With the CD serving as the collateral, lenders normally offer better APRs because even if the borrower defaults on a CD loan, the lender can recoup its losses by taking over the CD. However, when you back a loan with a CD, you risk losing that certificate should you fail to make payments.

How does a CD loan work?

Secured loans are backed by some form of collateral. 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 secured 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 without incurring a penalty. CD-secured loans are personal loans, meaning you can use the money for almost any expense.

What are the pros and cons of a CD loan?

CD-secured loans might be a good idea for some, but they aren’t right for everyone. Here are some of their biggest benefits and drawbacks.

Pros of CD loans

  • Easy application process: 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.
  • Continued growth: Your CD continues to earn interest throughout the life of the loan.
  • Long repayment terms: Banks and credit unions usually offer generous terms, sometimes allowing you to repay funds for up to 10 years.
  • Good for those with bad credit: Borrowers with poor credit often qualify for CD-secured loans.

Cons of CD loans

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

Does a CD loan build credit?

CD loans do build credit if you use them wisely. With its low risk and low interest rate, a CD loan can offer a good route for establishing or rebuilding credit. However, 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. If you default, you could lose your CD and damage your credit rather than improve it.

Who is a CD loan best for?

If you’re in a pinch and can’t borrow money from any other place — like a personal loan or a 401(k) loan —  or don’t have access to a credit card, a CD loan is a good option. People with long credit histories and a good credit score will benefit the most, as these borrowers can borrow a larger sum of money at a low interest rate. But if your credit score is on the lower end, a CD may still be ideal since you’ll build positive credit history over time, assuming you make timely loan payments.

A CD loan is also a good option for individuals who want to pull funds from their CD without facing early withdrawal penalties. When you take out a CD loan, even though you’re not technically borrowing from your CD, you may be able to borrow up to the amount currently in your CD.

Before committing to a CD loan, compare any loan fees to the CD’s early withdrawal penalty. If it would cost less to simply withdraw all the funds in your  CD before it matures, a CD loan may not be the best option.

Who should avoid CD loans?

CD loans are an option if you don’t qualify for any other type of borrowing. If you have an emergency fund, retirement accounts, taxable investment accounts, or even credit cards, you don’t need to explore a CD loan.

Additionally, if you don’t currently have a CD, you won’t qualify for a CD loan, so you’ll want to look elsewhere to borrow money.

How to apply for a CD loan

Applying for a CD loan is similar to applying for any other type of loan. Here are the basic steps:

  1. Check your credit. When you apply, your lender will likely perform a hard credit check to ensure that you are financially responsible and able to meet the payment terms of your new CD loan.
  2. Compare CD loan terms. Your rate and terms may be determined based on your financial picture, but generally, you can’t borrow more than the amount you have in your CD. Depending on your bank, you may be able to choose from a selection of loan terms.
  3. Gather the required documents. You’ll need to provide your personal information, financial information and loan details.
  4. Complete your application. Most banks allow you to apply for a CD loan over the phone, online or at a branch. Once you’re approved, you could receive funds within a few days.

Alternatives to CD loans

If your bank does not offer CD-secured loans or you want to explore similar options, consider these:

  • Unsecured loans: Unsecured loans don’t require collateral, so you’ll need good credit to qualify, and interest rates will likely be higher than those on CD loans. Still, these loans are a good option if you don’t want to put your assets at risk.
  • Savings-secured loans: With a savings-secured loan, you pledge the funds from your savings account as collateral. 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.
  • Secured 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 and you can eventually qualify for an unsecured credit card. 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.

Bottom line

If you have a CD and need cash quickly, a CD loan could be a viable option. It’s an easily accessible debt product that can help improve your credit health if managed wisely, and the funds in your CD will continue to grow while you make loan payments. But these loans aren’t without drawbacks, and the cost of borrowing could outweigh the benefits of taking out a loan, which means making early withdrawals from your CD may be the better option.

Consult with your bank or credit union to learn more about CD loan options that may be available to you. It’s equally important to inquire about loan terms to determine if you should move forward with applying for a loan or explore alternatives.

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.

Frequently asked questions

  • Most banks and credit unions that offer CDs have the capacity to offer CD loans. It’s a good idea to review see every benefit and restriction before you apply for a CD.
  • Your CD loan interest rate depends on the institution you’re borrowing from, your credit score, and your repayment terms. Interest rates vary, so it’s a good idea to compare interest rates on CD loans and other types of borrowing options, like unsecured personal loans, credit cards, and a credit card cash advance.
  • When you take out a CD loan, you may be able to borrow the full value of your CD. For example, if you have a $1,000 CD, you may be able to borrow up to $1,000, with your CD serving as collateral. However, when the CD matures, you cannot cash it out and collect the funds until you’ve repaid the CD loan in full.