What is a CD loan and how do I apply?
A CD loan is a type of secured personal loan that uses your certificate of deposit as a guarantee. Also known as CD secured loan, CD loans are a way to borrow money in an emergency, debt consolidation and more. These types of loans often have lower interest rates than other types of loans, although they have both advantages and disadvantages.
What is a certificate of deposit (CD)?
A certificate of deposit (CD) is a special type of savings account that increases in value over a specific period of time, typically six months to five years. Unlike a regular savings account, you are usually not able to make withdrawals, which makes it more of a long-term savings instrument than an instrument designed for short-term gains. CDs are usually offered by commercial banks and have their own limits, but they can still prove to be much more profitable than your average savings account.
What is a CD secured loan?
A CD loan is a type of Personal loan who uses your certificate of deposit to secure the loan funds. With the certificate of deposit serving as collateral for the loan, lenders normally offer better APRs because even if the borrower defaults on a CD loan, the lender can recoup their losses through the CD. However, when you back a loan with a CD, you might lose that certificate if you fail to make your payments.
How it works?
Secured loans are backed by some form of collateral. For example, if you take out a mortgage to buy a new house, the house serves as collateral. Auto loans work the same way; the automobile for which you get a loan becomes the collateral to secure the debt. When a borrower defaults on a secured loan, the lender can seize the collateral to cover the outstanding debt, which is why secured loans pose lower risks for banks and credit unions.
With a loan secured by CD, your certificate of deposit serves as collateral. CD loans allow you to keep your investment and get the extra cash you need. Loans secured by CD are personal loans, which means that you can use the money for almost all types of expenses.
Advantages and disadvantages of a CD loan
CD secured loans are not for everyone. Here are some of their main advantages and disadvantages.
Benefits of CD Loans
- When you apply for a CD loan from a bank or credit union that holds your CD, you can often get loan approval quickly, sometimes within hours, and receive funds in a day or two.
- CD loan rates are often much lower than unsecured loan rate.
- Loans secured by CDs often have fixed interest rates, so you will be paying the same amount each month.
- Your CD continues to earn interest throughout the life of the loan.
- Lenders usually allow you to use the funds as you see fit.
- Banks and credit unions usually offer generous terms, sometimes allowing you to repay funds for up to 10 years.
- Borrowers with poor credit are often eligible for loans secured by CD.
Disadvantages of CD loans
- Not all banks and credit unions offer CD guaranteed loans.
- Typically, you must already have a CD to qualify.
- Lenders may charge a origination fee or prepayment charge to repay the loan before the end of the term.
- You cannot withdraw your CD until you have paid off the loan.
Does a CD loan create credit?
The short answer is yes. With its low risk and low interest rate, a CD loan can offer a good route to establishing or rebuilding credit. However, using a CD secured personal loan to improve your credit score will only work if you make the payments in full and on time. Even though the lender can seize your CD if you default, they will still report your default to the credit bureaus: Experian, Equifax and TransUnion.
While building or improving credit is the most common reason for taking out a CD secured loan, keep in mind that the lender may foreclose on your investment if you don’t pay back the loan. If this happens, you could end up losing your CD and damaging your credit instead of improving it. Never consider a CD secured loan if you are facing job loss or expenses that could lead to financial instability, such as a major health crisis. In these cases, using your investments might make more financial sense.
If you want improve your credit score Without paying interest, you can also reach your goal by getting a credit card, charging a small expense each month, and paying off the balance in full and on time.
Who is best for a CD loan?
A CD loan is good for people who wish to build or repair credit, especially since these types of loans generally offer lower interest rates to people with poor credit than unsecured personal loans. It is also a good option for people who have a solid understanding of their monthly finances, as paying off the loan each month is essential in order to avoid losing CD funds. People with a long credit history and a good credit rating will benefit the most, as these borrowers can borrow a large amount of money at a very low interest rate.
A CD loan is also a good option for people who want to take advantage of their CD funds without facing early withdrawal penalties. Although technically you aren’t borrowing on your CD with a CD loan, you may be able to borrow up to the amount currently on your CD. Before committing to a CD loan, however, compare the loan fee to the early CD withdrawal penalty. While it would cost less to just break your CD sooner, a CD loan might not be the best option.
How to register
Applying for a CD loan is similar to applying for any type of loan. Here are the basic steps:
- Check your credit. When you apply, your lender will likely perform a credit check to make sure that you are financially responsible and able to meet the payment terms on your new CD loan.
- Compare the CD loan terms. Your rate and terms can be determined based on your financial situation, but generally you can’t borrow more than the amount you have on your CD. Depending on your bank, you can choose from a selection of loan terms.
- Gather the required documents. You will need to provide your personal information, financial information, and desired loan details, although your bank may already have some of these on file.
- Complete your application. Most banks allow you to apply for a CD loan over the phone, online, or at a branch. Once your application is approved, you could receive funds within days.
Alternatives to CD loans
If your bank does not offer CD secured loans, you have other options:
- Unsecured loans: Unsecured loans don’t require collateral, so you’ll need good credit to qualify, and interest rates will likely be higher than CD loans. Nonetheless, these loans are a good option if you don’t want to put your assets at risk.
- Loans guaranteed by savings: With a retirement savings loan, you put the funds in your savings account as collateral. Like CD loans, loans secured by savings generally offer lower interest rates than unsecured loans. Guaranteed savings loans often come with fixed rate terms, so you can make the same monthly payment throughout the life of the loan. Since your equity is backing the loan, banks often offer same-day approval.
- Secured credit cards: If you don’t need a specific amount of money and just need to build or repair your credit, a secure credit card offers great benefits. To get one, you need to make a cash deposit, which sets the limit you can spend with the card. For example, if you deposit $ 1,000, you can use the card to spend up to $ 1,000. Depending on the terms of the card, the lender may extend a certain credit limit over time if you establish a good credit history.