Looking for cash? CD-secured loans, or Certificate of Deposit secured loans, offer a creative solution for accessing funds. By using your CD as collateral, you can secure a low-interest loan while still earning interest on your deposit. It’s a win-win: your financial goals stay intact, and you get the cash you need without hefty penalties.
What Is a CD-Secured Loan?
A CD-secured loan is a type of loan where your CD acts as collateral. Instead of withdrawing money from your CD and facing potential early withdrawal penalties, you can use your CD to secure a loan at a lower interest rate compared to unsecured loans or credit cards. This allows you to access cash without disrupting your savings strategy. Typically, a CD-secured loan is used as a short-term loan and matures at the same time as the CD. However, many lenders will extend the loan with new terms, if the CD is renewed and the loan interest is paid.
Why a CD Loan Makes Sense Today
1. Lower Interest Rates Compared to Other Borrowing Options
With interest rates still relatively high on credit cards and personal loans, borrowing against a CD can be a cost-effective alternative. Since your CD serves as collateral, lenders offer lower rates compared to unsecured borrowing options. The rates are typically 2% to 4% above your CD rate. For example, if your CD is earning 3%, your loan rate would be 5% to 7%. You would continue to earn 3% on your CD, so your net rate would be 2% to 4%. A CD loan can be particularly useful if you need cash for an emergency, home repair, or living expenses after a job loss.
2. Preserve Your Savings and Avoid Early Withdrawal Penalties
If you withdraw funds from a CD before maturity, you may face steep penalties, reducing the interest you’ve earned. A CD loan allows you to borrow without breaking your CD, ensuring that your savings continue to grow at a fixed rate.
3. Maintain Your CD’s Fixed Rate in a Falling Rate Environment
If the Federal Reserve lowers interest rates in the coming months, the returns on newly issued CDs may decline. If you have an existing CD with a high rate, a CD loan allows you to keep that higher return intact while still accessing your funds.
4. Flexible Repayment Options
CD loans often come with flexible repayment terms, making them a manageable borrowing option. Since your CD acts as collateral, lenders may not require payment until the CD matures or may only require interest-only payments until the CD matures. You can then choose to pay off the loan with the CD funds, pay off the loan with other funds, or renew the CD and extend the loan with new terms. This can help with budgeting, especially if you’re dealing with unpredictable expenses.
5. Opportunity to Build or Improve Credit
CD loans can be easier to obtain than traditional personal loans, making them a great tool for individuals looking to build or improve their credit. By making on-time payments, borrowers can strengthen their credit profiles, which can lead to better loan terms and financial opportunities in the future.
Is a CD Loan Right for You?
A CD loan can be an excellent choice if you need cash but want to keep your savings intact. It’s a smart option for those looking to avoid high-interest debt, maintain investment growth, and navigate today’s shifting rate environment wisely. However, it’s essential to compare loan terms and consider whether the repayment schedule fits your financial situation. Most importantly, not all financial institutions offer CD loans so check with your credit union. Consider asking about CD loans next time you open a new CD so that you can make sure the option is available should you need it.
