What Is A CD Loan And How Can I Apply For One?

Photography by Getty Images; Illustration by Bankrate

CD loans are secured personal loans where your certificate of deposit – a type of savings account that has a fixed term and interest rate – is used as collateral. Opening a CD loan can help you avoid withdrawing funds from your CD account before the term ends, which would incur a penalty.

Like other forms of borrowing, you can use a CD loan for many reasons, like financing an emergency, paying for a home renovation or consolidating debt, but this method isn’t an option for everyone. Only those who have an active CD can take out a CD-specific loan.

Best CD rates

Interested in opening a CD account but want to shop around? Take a look at some of the best offers from lenders.

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What is a CD-secured loan?

A CD loan, also known as a CD-secured loan, uses your certificate of deposit as collateral. Because you’re borrowing against your balance and not withdrawing the funds, the loan allows you to retain your investment without penalty.

Like with other secured debt, lenders normally offer lower APRs for CD loans than unsecured debts like credit cards. Lenders can pull back on the eligibility requirements and charge lower interest rates because the loan balance is backed by the money in your CD.

While this is ideal for the lender, it can pose a risk to you, the borrower. If you default on the CD loan, the lender can seize your CD to cover any delinquent payments.

How to apply for a CD loan

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

1. Compare CD loan terms: Rates vary depending on the lender. Shop around to ensure you get the best deal for you.
2. Gather the required documents: Documentation requirements also vary, but you’ll likely need to provide your Social Security number, government-issued ID and most recent pay stubs.
3. Complete your application: After you’ve selected a lender, submit an application online or in person.
4. Repay the loan as promised: Make on-time payments to avoid late fees and damaging your credit file.

Who are CD loans best for?

CD loans may be an excellent choice for consumers, depending on their unique financial situation.

1. People who are building or rebuilding credit: Certified financial planner John Bell says, “I think they are best for those that are building credit and maybe don’t have access to more traditional credit options, like a loan from a bank or a credit card.”
2. People who want to avoid early withdrawal penalties: A CD loan is also a good option for individuals who want to use the funds in their CD as collateral to avoid early withdrawal penalties. While you’re not borrowing from your funds when you take out a CD loan, you may be able to borrow up to the amount you currently have in your account.

Pros and cons of a CD loan

CD-secured loans are ideal for people who have difficulty getting approved for a loan but are confident in their ability to repay the loan. While there are advantages and disadvantages, they can be useful borrowing tools for those who qualify.

Pros

• Easy application process
• Your CD continues to earn interest
• Long repayment terms
• Good for those with bad credit
• Lower rates compared to alternatives

Cons

• Not widely available
• CD account required
• Might cost more than cashing out your CD
• No access to funds
• Loss of funds
• Limited loan amount
• Can’t borrow against CDs in retirement accounts

• Pros in detail
  

  • 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.
  • Your CD continues to earn interest: Your CD continues to grow 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 may qualify for a CD-secured loan.
  • Lower rates compared to alternatives: CD loans generally come with lower interest rates than other types of debt, including credit cards and unsecured personal loans.

• Cons in detail
  

  • Not widely available: Not all banks and credit unions offer CD-secured loans.
  • CD account required: Most lenders require that you already have an active CD to qualify.
  • Might cost more than cashing out your CD: Some CD loans carry interest rates that are higher than your CD’s rate. “Lenders tend to add [a] margin on loan rates, which normally makes borrowing more expensive than saving (i.e. [by] owning a CD),” says Chris Diodato, CFA, CFP and founder at WELLth Financial Planning.
  • No access to funds: You cannot cash out your CD until after you’ve paid off the loan.
  • Loss of funds: If you cannot pay off the loan, the financial institution will deduct the funds from your CD to recoup what’s owed.
  • Limited loan amount: You can typically only borrow a certain amount based on a percentage of your CD’s value — often between 80 and 95 percent.
  • Can’t borrow against CDs in retirement accounts: “CDs within retirement accounts such as IRAs and Roth IRAs cannot be used to obtain a CD loan,” says Diodato. “The IRS prohibits pledging IRA assets for a loan and would treat such an action as an immediate and taxable distribution.”

Does a CD loan build credit?

A CD loan may be a good way to build credit if you make consistent, on-time payments since around 35 percent of your FICO credit score is based on repayment history, but it’s important to note that not all banks report CD loans to credit bureaus. If you’re hoping your CD loan will help improve your credit, make sure to check with your bank first instead of assuming your payment will be reported to credit bureaus.

That said, even though they’re a lower risk than other options, a lender can still seize your CD and report your delinquency to credit bureaus. Avoid defaulting on your balance since it will severely impact your credit score and can remain on your credit report for seven years.

3 Alternatives to CD loans

If you don’t have a qualifying CD or can’t find an option that fits your needs, you could consider a few financing alternatives.

• Unsecured loans
  

  Unsecured loans, like personal loans, don’t require collateral. You’ll need good credit to qualify with most lenders, but there are options for those with bad credit. Keep in mind that unsecured loans typically carry higher rates than CD loans, but they’re still 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. Like with a CD loan, if you default on the balance, you could use your hard-earned savings account to satisfy the delinquent payments.

• Secured credit cards
  

  A secured credit card offers benefits if you do not need a specific amount of money and simply need to build or repair your credit. Plus, with a positive repayment history, you may be able to qualify for an unsecured card down the road.

  To be eligible for most secured cards, you’ll need to put down a cash deposit. This deposit acts as collateral and your credit limit. For instance, if you deposit $1,000, that will be your collateral, and you can use the card to spend up to $1,000.

Bottom line

A CD loan could be viable if you have a CD and need cash quickly. It’s easily accessible, even for those with low or no credit, and can help improve your credit health if managed wisely. The funds in your CD will even continue to grow throughout the loan term.

These loans are not without its drawbacks. Simply making early withdrawals from your CD may sometimes be the better option. Consult with your online lender, 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.

Frequently asked questions

• What are CD loan interest rates?
  

  Your CD loan interest rate depends on the institution you’re borrowing from, your credit score, and your repayment terms. Interest rates vary, so comparing interest rates on CD loans and other borrowing options, like unsecured personal loans, credit cards and a credit card cash advance, is a good idea.

• When does using a CD loan make sense?
  

  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 for some. You can also use it to consolidate high-interest debt balances with minimum payments that are draining your wallet or for a small much-needed home repair or renovation.