What Is A Certificate of Deposit (CD) Loan?

In 2019 alone, 36% of Americans over age 55 bought a certificate of deposit. Like a savings account, certificates of deposit (CD) let you submit money in exchange for an interest premium. Unlike a savings account, this interest rate remains fixed. You must also agree not to touch the money for a predetermined amount of time — this is known as the CD’s “maturity date.” If you withdraw money before the CD matures, you’ll face a penalty.

When you open a CD, you qualify for a CD loan. These loans are generally easy to access, which makes them a useful option for those in need of emergency funds. Here’s a closer look at CD loans and whether they’re the right choice for you.

What Is a CD Loan?

A CD loan is a loan secured by the money in your certificate of deposit. In other words, your certificate of deposit serves as collateral — if you fail to pay off your loan, your bank will seize your CD funds.

Similar to personal loans, a CD loan comes with a fixed interest rate and monthly repayments. You typically also have to pay an “origination fee” before taking out the loan. The amount of money you can borrow is limited to what’s in your CD, while the loan term is directly connected to your CD’s maturity date. For example, if your CD matures in 8 months, your loan term cannot exceed 8 months.

Benefits of CD Loans

Like all loan types, CD loans come with unique pros and cons. Some of the key benefits include:

  • Simple qualification process: Since the bank already has collateral, It’s generally easy to qualify for a CD loan. Candidates can qualify even with a poor credit history or high debt-to-income ratio.
  • Low Interest Rates: Because you are offering collateral in exchange for the loan, the bank is not taking a high risk. Thus, banks will typically have interest rates lower than those found in unsecured loans.
  • Opportunity to build credit: If you have poor credit, it can be difficult to rebuild it because you cannot qualify for most loans. Thanks to the simple qualification process, CD loans give you the chance to build your credit score back up.

On the downside, your loan is restricted to the amount you have on your CD. You also risk losing your funds if you can’t pay back the loan in time.

Is a CD Loan Right for Me?

While almost anyone with a CD can take out a CD loan, they’re usually best for people that:

  • Need short-term emergency funds
  • Are interested in building credit

Before you take out a CD loan, make sure that it’s less expensive than just cashing out your CD. Sometimes, the interest of the loan (as well as the origination fee) can cost more than the withdrawal fees that come with your CD. Taking the time to review your options is key to making the right decision for your financial well-being.

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