Certificates of deposit (CDs) can be used as collateral for certain types of loans; one such type of loan is called a CD-secured loan. If you get a CD and then can't make your payments, you'll lose it.
Let's explore how a CD-Secured Loan works and the pros and cons of CD-secured loans.
Consumers often use CDs as a savings method for both short and long-term objectives. But through a CD-secured loan, some banks and credit unions let CD holders get loans against their CDs. A CD-secured loan is a form of personal loan in which you are necessitated to put up a CD as security for the loan.
Note: Your monthly payments will be predetermined by the loan's principal, rate of interest, and duration of repayment.
You can get a loan based on the value of your CD if your bank or credit union provides this type of loan. In this case, you won't have to worry about paying any fees for cashing out too soon. You can use the money from a CD-secured loan for anything you need it for, including improving your credit score, paying off debt, making needed house repairs, and more.
Banks provide varying loan amounts and interest rates. For example, having a CD with Howard Bank, you may take out a loan for up to 95% of the value of your CD, and you have up to five years to pay it back. Howard could give you a loan of up to 95% of the value of your CD, so if your CD is worth $2,000, you might borrow up to $1,900.
One important thing to remember is that if you fail to make your loan payments, the bank, as well as the credit union may liquidate the CD to repay the outstanding balance. The CD's early withdrawal charges would apply in this situation.
Regardless of the lender you select, you will likely return a CD-secured loan with set monthly Installments, which are based on the number of months you are supposed to repay the loan and your interest rate; You may review both of them before accepting the loan.
The following banks, as well as credit unions, provide CD-secured loans:
CD-secured loans, like any other type of financial instrument, come with their unique set of Pros and Cons.
Pros
Cons
For the simple reason that lenders see less risk in lending against funds that have already been deposited.
CD loans have set monthly payments, so you'll know exactly how much money you'll need to pay back each month.
A CD loan may be an option if you want to establish or improve your credit history that has been turned down for a credit card and any other loan. Your lender would probably record your payment history with major credit agencies.
You can't get a CD-secured loan unless you either have or are prepared to open a CD.
It's possible that your local bank or credit union won't provide you with a CD-secured loan. Some of the major banks (e.g., Chase and Bank of America) won't offer the types of financing options that are available here.
Because your CD serves as security for the loan, you wouldn’t have access to that money until the CD is paid off.
Many large financial institutions don't even provide CD-secured loans, despite the fact that they own CDs. If you have a CD with a bank, you should be able to find out whether you may or may not get a loan based on that CD by doing a short web search on the company's website.
When compared to unsecured personal loans, which can have significantly different interest rates depending on criteria such as credit score, loan size, and payback duration, CD-secured loans from banks are usually rather attractive. For example, the interest rate on an unsecured personal loan from Wells Fargo is 5.74% - 20.24%, whereas the interest rate on a CD-secured loan is 5.25% - 13.54%.
If you take out a CD-secured loan and don't make your payments as agreed, the lender might take the money out of your CD. Between $1,000 - $250,000 is the range for loan amounts.
The processing time for CD-secured loans is typically quite short. Because the bank already has the CD as security, approving a CD loan is typically faster than approving other forms of loans.
Since the bank already has your collateral in its possession, the approval process for these loans is typically a little bit simpler than it is for other forms of personal loans.
According to Experts, obtaining a loan backed by a certificate of deposit can "dramatically boost" your chances of being approved for a loan when compared to applying for other forms of loans.
If you are considering getting a loan secured by a CD, it is essential for you to first determine whether or not getting the money will be beneficial to you and then formulate a strategy for how you will pay back the loan.
Unless you are actively working to improve your credit score, it is suggested that you should not pursue this technique because it is unlikely to result in the best financial outcome.