What Is a CD-Secured Loan?

Definition and Examples of CD-Secured Loans

A young mom looks at options for CD-secured loans.
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A CD-secured loan is a loan that requires you to use a certificate of deposit (CD) as collateral. If you take one out and default on your payments, you risk losing that CD.

Let’s dig deeper into how CD-secured loans work, their pros and cons, and alternative options you may want to consider. 

What Is a CD-Secured Loan?

Consumers typically use CDs to save money for short and long-term goals. However, some banks and credit unions allow CD holders to borrow money against a CD through a CD-secured loan. Essentially, a CD-secured loan is a type of personal loan that requires you to put up a CD as collateral.

  • Alternate name: CD Loan

Your loan will come with fixed payments that will be based on the loan amount, interest rate, and term. 

How a CD-Secured Loan Works

If you own a CD and your financial institution offers CD-secured loans, you can borrow against the funds you’ve already saved. You’ll be able to do so without being on the hook for early withdrawal penalties. A CD-secured loan can help you build credit, consolidate debt, cover a home improvement project, or pay for other expenses.

Your rates and loan amount will vary between banks. Howard Bank, for example, allows you to borrow against up to 95% of what’s in your CD with a maximum repayment term of five years. If you have a CD with $2,000 in it, Howard could approve you for up to a $1,900 loan (95% of your CD balance).

If you default on your loan, the bank or credit union may use money from your CD to cover your loan payments. If this happens, you’ll likely pay the CD’s early withdrawal penalty. 

No matter which lender you choose, you’ll probably repay your CD-secured loan via fixed monthly payments based on how many months you have to pay the loan back and your interest rate, both of which you can review before you accept the loan.

Some of the banks and credit unions that offer CD-secure loans include: 

  • Wells Fargo
  • SunTrust
  • Howard Bank
  • First Financial Bank
  • Yolo Federal Credit Union
  • Credit Union One

Pros and Cons of CD-Secured Loans

Just like all financial products, CD-secured loans come with their own set of advantages and drawbacks. 

Pros
  • Lower interest rates

  • Predictable payments

  • Credit-building tools

Cons
  • CD required

  • Not available everywhere

  • CD funds committed for the life of the loan

Pros Explained

  • Lower interest rates: Compared to credit cards, payday loans, and other types of financing options, CD loans offer lower interest rates. This is because they’re secured by money you’ve already deposited and pose less of a risk to lenders.
  • Predictable payments: Once you take out a CD loan, you’ll repay it via fixed payments that you can plan for in advance. 
  • Can build your credit: If you’d like to build your credit and can’t get approved for a credit card or another loan, a CD loan may help you do so. Your lender will likely report your payments to the major credit bureaus. 

Cons Explained

  • CD required: A CD-secured loan isn’t an option unless you already have a CD or are willing to open one. 
  • Not available everywhere: If you’re interested in a CD-secured loan, there’s a chance your bank or credit union won’t offer them. You won’t be able to find these financing solutions at some larger banks like Chase and Bank of America.
  • CD funds committed for the life of the loan: Because your CD is used as collateral for your loan, you won’t have access to those funds until the loan is repaid.  

Alternatives to CD Loans

If you believe a CD-secured loan isn’t right for you, you may want to consider a share-secured loan, secured credit card, or a short-term loan from a bank: 

  • Share-secured loan: Some credit unions offer “share secured loans.” These loans use your savings account as collateral and, like CD-secured loans, tend to offer competitive interest rates. Consumers Credit Union and Alliant Credit Union are examples of credit unions that offer share-secured loans. 
  • Secured credit card: A secured credit card is one way to build your credit history if you don’t want to do so via a CD loan. You make a deposit, which serves as your credit limit, and then improve your credit by making on-time payments.
  • Short-term loan from a bank: U.S. Bank offers small loans with simple terms. You can borrow up to $1,000 that you have to repay in three months with fixed payments. Fees are $12 for every $100 you borrow. While the terms are easy to understand, the interest rates tend to be higher than normal.

Key Takeaways

  • A CD-secured loan involves using a certificate of deposit (CD) as collateral in exchange for money to build credit, consolidate debt, or cover an expense. 
  • The advantages of CD loans include lower interest rates, predictable payments, and the ability to build credit.
  • The drawbacks of CD loans are interest charges, the CD requirement, and the fact that they aren’t available everywhere.
  • If you believe a CD-secured loan is not right for you, you may want to consider a share-secured loan, secured credit card, or a short-term bank loan.