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If you have a certificate of deposit (CD) account, you may be waiting for it to mature before withdrawing your cash. But if you need the money now, there’s a way to circumvent those pesky early withdrawal fees: CD loans.
What is a Certificate of Deposit?
A certificate of deposit is a savings account that earns interest for a specified period of time (typically 6 months to 5 years). Unlike a regular savings account, CDs lock your funds until the account matures. While you can technically withdraw your money early, you’ll pay a penalty for doing so. The bank compensates you with a higher interest rate than you’ll find on most savings accounts.
What Is a CD Loan?
CD loans are secured personal loans that use your CD as collateral for your debt. Since you’re taking out a loan instead of withdrawing funds, you aren’t on the hook for early withdrawal penalties. And, like most personal loans, you can use the loans for almost anything, from medical expenses to your Italian vacation. (Not that we’re advocating the last one.)
How Do CD Loans Work?
When you take out a secured loan, such as an auto loan or mortgage, you agree to put up your car or house as collateral for your debt. As long as you make your monthly payments, you’re in the clear. But if you default on your loan, the lender can repossess your property to pay your debt.
CD loans work similarly to other secured loans. You’ll have a set borrowing amount, loan length, and interest rate. That said, your loan length is based on your CD’s maturity date, which means you’ll have to repay your debt in full before you can cash out your CD. And instead of securing your loan with physical property, you’re securing it with the cash in your account.
Because these loans are typically low-risk for lenders, they may offer better APRs and higher approval rates than on other loans. Some banks also offer perks like same-day approval or funding, making them a convenient option if you need an emergency loan.
However, CD loans may come with restrictions that other loans don’t. For instance, your lender may let you borrow the full balance of your account, or they may restrict you to a percentage of your savings. It’s also common for lenders to only offer CD loans on accounts you hold with their institution.
How to Get a CD Loan
#1. Prepare Your Finances
If you don’t already have one, the first step is to open and fund a CD account. You should also check your credit score or credit report and address any red flags. (Though you may still be able to qualify with a lower credit score than usual). Now’s also the time to gather any personal or financial documents the lender requires.
#2. Apply for a CD Loan
The next step is to fill out a loan application online, in person, or over the phone. Be prepared to share your personal, employment, and financial information.
#3. Review the Terms
Once the lender makes a loan offer, be sure you understand the terms and fees before signing. Watch out for unsavory characters like prepayment penalties, origination or late fees, and unreasonably high APRs. Typically, you can also select your preferred loan term, which may range up to the maturity date of your CD.
#4. Sign the Agreement and Check Your Bank Account for Funds
Next, it’s time to sign the agreement and wait to get paid. Typically, CD lenders provide funds within 48 business hours, though some hand over the money the same day.
#5. Begin Making On-Time Payments
The last step is to actually repay your loan. Not only do you want to avoid late fees, but defaulting risks the bank seizing your account. Bear in mind that your CD will likely be frozen until you repay your loan, so you won’t be able to make any early withdrawals.
Pros and Cons of CD Loans
Pros:
- Easy to qualify and access
- Low-interest rates
- Can help build your credit history
- Your CD continues earning interest for the life of the loan
Cons:
- Must have a CD
- You risk your savings if you default
- Not all banks and credit unions offer CD loans
- You can’t cash out your CD until you repay your loan
- Loan costs may be higher than early withdrawal fees
Can You Pay Off a CD Loan Early?
Typically, yes, you can repay your CD loan early. But some banks may charge prepayment penalties for the privilege.
What Are the Advantages of a CD Loan?
CD loans come with a number of advantages, including:
- Easy application and qualification process. When you apply for a CD loan with the bank or credit union that holds your account, you can receive approval (and funds) within a day or two. CD loans often come with more lenient requirements due to their cash account collateral, permitting high debt and bad credit borrowers to qualify more easily.
- Credit-building opportunities. If your lender reports on-time payments to the major credit bureaus, CD loans can also improve your credit. (Assuming you pay your debts on time.)
- Interest growth offsets your APR. CD loans have some of the lowest APRs around. While your APR rate will almost certainly outpace the interest your CD earns, if you need to borrow anyway, using your CD means you’re still earning while you borrow.
What Are the Risks of a CD Loan?
Like other types of debt, CD loans do come with risks, including:
- Potentially losing your savings. If you can’t repay your debt or fall behind on your payments, the bank may seize your CD to cover your obligations.
- Cash-out restrictions. Most lenders “freeze” your CD until you repay your loan, meaning you can’t access your funds until your loan is repaid in full.
- Increased borrowing costs. Most CD loans’ APRs outpace the interest you earn on your account, which means you’re still paying to borrow money. Plus, some lenders also charge application, origination, and late fees, as well as prepayment penalties.
Alternatives to CD Loans
#1. Unsecured Personal Loan
Unsecured personal loans don’t require collateral to secure the loan. As a result, they typically come with stricter borrowing requirements, higher interest rates, and sometimes, more limited repayment terms. For example, Upgrade, Upstart, and Best Egg all offer unsecured personal loans with competitive interest rates and low fees. That said, you don’t risk losing your collateral if you can’t pay up.
>> More: See the Best Personal Loans
#2. Secured Personal Loan
All secured personal loans use some type of collateral against your debt. If you don’t want to put up your CD, you can use your home or car instead. Other common types of collateral include regular savings accounts and jewelry.
#3. Secured Credit Card
If you’re using a loan to repair your credit, consider a secured credit card over a CD loan. Essentially, you make a cash deposit with the card issuer, who then grants you a credit card with a limit usually at or below the value of your deposit. Then, you use the card and repay your debt monthly, thereby establishing a positive credit history. And if you can’t pay off your debt, the lender can seize your deposit.
#4. 0% APR Credit Card
Many credit cards offer a 0% interest introductory period (usually around 6-18 months) for new purchases or balance transfers. If you qualify, all you have to do is make your minimum monthly payments and use the card like normal. And if you repay the balance before the promotion expires, you won’t pay interest on anything you buy during the intro period.
#5. Peer-to-Peer (P2P) Loan
Peer-to-peer lending lets you access funds without going through a traditional lender. You can find these loans in online P2P marketplaces – such as LendingClub and Prosper – that match investors with qualified borrowers. Note that you’ll still have to apply, and you may not receive the requested balance of your loan. That said, P2P lending can make it easier for bad credit borrowers to get the funds they need.
Bottom Line: What Is a CD Loan?
For the most part, CD loans are best for people who need to repair their credit historyor plan to take out a personal loan anyway. It’s also a way to access your funds now without paying early withdrawal penalties, which may exceed the interest you’d pay on your loan. But if you’d get a better deal by cashing out now, the perks of CD loans typically favor banks over borrowers.
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