What Is a CD-Secured Loan?

If you have a certificate of deposit, you may be able to use it to borrow money

If you have a certificate of deposit (CD) from a bank or credit union, you may be able to use it as collateral to borrow money. This type of loan is called a CD-secured loan and it can be a good way to borrow in an emergency. However, you risk losing your CD if you fall behind on your loan payments. In this article, we’ll look at what a CD-secured loan is and help you decide if one is right for you.

Key Takeaways

  • CD-secured loans allow you to borrow money using a certificate of deposit (CD) as collateral. 
  • These loans generally offer low interest rates because they are low-risk for lenders.
  • CD-secured loans are also available to people with low credit scores or limited credit histories, who might not qualify for other types of loans.

How CD-Secured Loans Work

When you buy a CD, you agree to leave your money with issuing bank or credit union for a set length of time, ranging from a few months to a number of years. In exchange, the issuer promises to pay a guaranteed rate of interest on your money that's typically higher than you could get on a regular savings account.

Because CDs offer that guaranteed return—and because most are insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA)—they are considered one of the safest investments around. However, a CD can be problematic if you need to get your money out before its term comes to an end.

While you can usually cash in or withdraw money from a CD prematurely, that typically triggers an early withdrawal penalty, sometimes a hefty one. An alternative is to take out a personal loan from a bank or credit union, using the money in your CD as collateral. A loan of this type is called a CD-secured loan or, more simply, a CD loan.

For banks and credit unions, CD-secured loans are a very low-risk proposition, so they can charge relatively low interest rates. However, if you can't pay back the loan, they will take your CD.

If you default on a CD-secured loan, the bank or credit union will not only withdraw money from your CD to cover your loan payments but might charge you an early-withdrawal penalty.

Pros and Cons of CD-Secured Loans

CD-secured loans can be a good way to borrow if you have sudden emergency expenses. They can also help you build a solid credit history. However, they are not without risks.

Pros of CD-secured loans

  • Low interest rates: Because CD-secured loans present very little risk to lenders, the rates of interest they charge are generally quite low.
  • Long repayment terms: Banks and credit unions may offer longer repayment periods on CD-secured loans, allowing you to pay the loan back over 10 years in some cases.
  • Building your credit score: Borrowers with poor credit or little credit history may be able to qualify for this type of loan. That's because it is based on their collateral (the CD), not their personal creditworthiness. Paying the loan back on time will also help them establish a good credit history and boost their credit score.

Cons of CD-secured loans

  • You need a CD: Obviously, a CD-secured loan isn't an option unless you already have a CD or are willing to open one. That means tying up your money in an investment with a relatively low rate of return.
  • Low availability: Not all banks and credit unions offer CD-secured loans, so you might have to shop around a little to find one.
  • No access to CD funds: Because your CD is used as collateral for your loan, you won't have access to that money until the loan is repaid.

Alternatives to a CD-Secured Loan

A CD-secured loan may not be your only option. These alternatives are worth considering if you don't have (or don't want to buy) a CD or if you have a low credit score:

  • A share-secured or passbook loan: These loans use your savings account as collateral and, like CD-secured loans, tend to offer competitive interest rates. That way, you don't have to take out a CD to borrow against your savings
  • A short-term personal loan: If you can get approved for a short-term personal loan from a bank or credit union, you might find that you can access more money than with a secured loan. Just make sure you pay back the loan on time, or you could adversely affect your credit score.
  • A secured credit card: This is a special type of credit card for people with poor credit or no credit history yet. You make a deposit, which then serves as your credit limit. As you charge purchases and make on-time payments, your credit score should improve, making you eligible for a regular, unsecured credit card and other types of loans. If you don't have a CD but do have some cash you could leave on deposit with a credit card issuer, this could be an option.

Who Is a CD-Secured Loan Best For?

CD-secured loans are most appropriate for people who need to borrow money, don't have other savings to tap (or to use as collateral), and wouldn't qualify for an unsecured personal loan.

Does a CD-Secured Loan Build Credit?

Yes. Your payments on the loan will be reported to the credit agencies, so taking out a CD-secured loan (and paying it back on time) can be a way to build up your credit score.

Is a CD-Secured Loan the Same as a Credit-Builder Loan?

Both a CD-secured loan and a credit-builder loan can help you establish good credit, but they work differently. With a CD-secured loan, you deposit money in a CD and use it as collateral to borrow against. With a typical credit-builder loan, a bank or credit union will lend you the money to put in your CD (or other savings account). As you make loan payments, the lender will report them to the credit bureaus. Once you've paid off the loan, the money is yours to keep.

The Bottom Line

CD-secured loans are a way of borrowing money against a certificate of deposit (CD) and can be an attractive alternative to cashing in the CD and paying an early-withdrawal penalty. CD loans generally have low interest rates because they are low-risk for lenders. They are also available to people with poor credit or no credit history and can help them build a good credit score. However, borrowers who are unable to pay the loan back could lose part or all of their CDs.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Certificates of Deposit."

  2. Experian. "How Secured Loans Can Help Your Credit."