Dear Dr. Don,
I have $30,000 borrowed against a CD, which was used to pay for my three kids’ college educations, to renovate a home, etc. I am now divorced and am only paying the monthly interest of around $90 per month on the loan. I will not be able to make significant payments on the loans. Therefore, would it be financially better to pay off the loans with the CD proceeds?
— Debbie Debtor
Taking out a loan using a CD as collateral can be a smart choice for people with bad credit, or for people who want the lower cost of a secured loan without liquidating their savings.
As a father who just wrote a tuition check, I can tell you that you got a lot of mileage out of your CD loan. It has served you well by financing home renovations and three kids’ college educations.
If you’re just treading water in the loan by making interest payments but not repaying principal, you’re smart to consider ending the loan by cashing in the CD. What you need to know is if there’s an interest penalty for early redemption of the CD or any prepayment penalty on the loan. Ask your banker for details. In the absence of any substantial penalties or fees, it makes sense to pay off the loan.
To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.