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How CD loans work

Get lower rates and build your credit by securing your funds.

Updated

Using a certificate of deposit (CD) as collateral for a secured personal loan can help you get lower rates and faster funds than most other credit union or bank loans. It can be a particularly great option if you have bad or no credit, since most lenders don’t have credit score requirements and report on-time repayments.

What’s a CD loan?

A CD loan is a low-interest secured personal loan from a bank or credit union that uses your CD as collateral. A CD is an interest-gaining savings account you can’t access until a certain date. If you withdraw the funds early, you have to pay a fee — typically based on the interest you would have earned. CD loans allow you to access your balance at a lower cost.

Since you’re borrowing against a savings account, these loans typically have lower credit requirements and a faster turnaround than other types of funding from a bank or credit union. These are also sometimes called a deposit secured loan. It works similarly to a share certificate loan.

How much can I borrow?

That depends on how much money you have in your CD. You can typically borrow up to 100% of your CD’s account balance, though in some cases it’s capped as low as 75%.

There usually isn’t a minimum loan amount. In the rare case that there is, it’s usually around $500.

What are the rates?

Typically, CD loans come with interest rates between 2% and 3% above the dividend rate on your CD. So if your CD comes with a 0.1% dividend rate, you might pay between 2.1% and 3.1% in interest. If you have a CD with a 2.5% rate, you’ll likely pay between 4.25% and 5.25% in interest.

What are the terms?

Your loan term is often tied to the maturity date on your CD. So if you can withdraw from your CD in 12 months, you have 12 months to repay the loan. In some cases, lenders offer longer terms that can run as long as five or even 10 years.

What are the eligibility requirements?

While it varies depending on the bank or credit union, you typically must meet the following requirements:

  • Regular source of income. You must show you have enough regular income to repay the loan.
  • Minimum CD balance. Some lenders might require you to have at least $500 or more in your CD.
  • In good standing. You might not be able to qualify for a CD with a bank if your account isn’t in good standing.
  • Age of majority in your state. To take out a loan, you must be at least 18 in most states, 19 in Alabama and Nebraska, and 21 in Mississippi.

Typically, there are no credit score requirements. In fact, your CD loan might not come with a credit check since you’re providing enough collateral to ensure the bank will get its money back.

How do I apply?

You can apply through the bank or credit union where you have the CD. Some might offer an online application, but most require you to apply over the phone or in person. Typically, you’ll follow these steps:

  1. Go to your bank’s website and check if they have CD loans.
  2. Call customer service or visit your local branch and say you’re interested in borrowing against your CD.
  3. Follow the instructions to fill out an application.
  4. Submit any required documents, such as recent pay stubs.
  5. Receive your funds.

If you have a checking account with that bank or credit union, you might get your money as soon as the next business day — or even faster.

How do repayments work?

CD loans typically come with monthly repayments. Consider signing up for autopay, if possible. Many banks and credit unions offer interest rate discounts if you make automatic repayments from one of their checking accounts. These can sometimes run as high as 0.5%.

What happens if I default on a CD loan?

Your bank or credit union will use your CD balance to cover the cost of the loan. It’ll also damage your credit score, since lenders typically report CD loan repayments to the main credit bureaus.

Reach out to your lender before you miss a payment if you think you’re in danger of defaulting. Some might be willing to adjust your terms.

What are the benefits of CD loans?

From low rates to fast funding, here are a few perks of borrowing against your CD:

  • Low rates. CD loans generally come with the same fixed rate for everyone — which can be lower than what you’d get on a personal loan with excellent credit.
  • Fast funding. You can receive your funds as soon as the next business day or possibly sooner if you also have a checking account with the lender.
  • Easy to qualify. These loans usually don’t have minimum credit requirements and few other criteria, making it a good short-term loan alternative.
  • Can build credit. Banks and credit unions usually report all repayments to the major credit bureaus, helping you build your credit.

Are there any drawbacks?

Consider these potential drawbacks before taking out a CD loan:

  • Must have a CD. You can only take advantage of this option if you already have money in this kind of savings account or are willing to open one.
  • Might have to apply in person. CD loans typically don’t come with an online application, so applying might take more effort than other personal loans.
  • Limited availability. You can only take out this loan if the bank or credit union that holds your CD offers it.

What alternatives should I consider?

Not sure a CD loan is right for you? Consider one of these alternatives instead:

  • Withdraw your CD funds early. In some cases, withdrawing your funds early might actually cost less than what you’d pay on a CD loan. Make sure a CD loan offers savings before you apply.
  • Savings secured loan. You also might be able to use another savings account to secure your loan, though these can come with higher rates.
  • Online personal loan. If you have good credit and don’t have a lot of time to spend on an application, consider applying for a personal loan with an online lender.
  • Share-secure loan. Credit unions sometimes offer another type of secured loan that uses your share account as collateral.

Compare personal loan options

Data indicated here is updated regularly
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Bottom line

CD loans can be a great alternative to personal loans and short-term loans. They’re easy to qualify for, relatively fast and come with some of the lowest rates out there. But you can’t qualify unless you have a CD with an institution that offers CD-backed loans — and not all do.

You can learn about your other borrowing options by checking out our guide to personal loans.

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