The Pros and Cons of CD Loans Explained

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What Is a CD Loan?

A certificate of deposit (CD) loan is a secured loan that uses your CD funds as collateral. This type of loan can be beneficial if you have difficulty qualifying for unsecured loans or prefer not to close your CD and incur an early withdrawal penalty.

Understanding CD Loans

CD loans are secured personal loans, meaning you receive a lump sum upfront and repay it in monthly installments. The terms can vary by lender, but generally:

• Loan amount: You can borrow between the minimum required loan amount and your CD’s balance.
• Interest rate: CD loans typically charge more interest than you earn on your CD, often your CD’s rate plus 2% to 3%.
• Repayment term: The loan term may match the CD’s remaining term, with repayment completed by the CD’s maturity date.
• Repayment options: Most loans have fixed monthly payments, and you can repay early without penalties.

CD loans can be easier to qualify for and may offer lower interest rates than unsecured loans, despite the higher interest compared to your CD earnings.

Pros and Cons of CD Loans

Consider the following pros and cons to determine if a CD loan is right for you:

Pros

• Easy qualification: Your CD’s balance, interest rate, and maturity date largely determine your loan terms.
• Fast funding: Your lender can quickly review and approve your application, often providing funds the same business day.
• Low interest rate: CD-secured loans may offer lower interest rates than unsecured loans, especially if you have poor credit.
• Build credit: On-time payments can improve your credit history and scores.

Cons

• Upfront fees: Some lenders charge application or origination fees, increasing your overall costs.
• Higher cost than cashing out CD: The total cost of a CD loan may exceed the cost of early CD withdrawal penalties.
• Maximum loan amounts: You may be limited to borrowing a percentage of your CD’s balance.
• Limited options: Loan terms depend on where you have CDs, and you likely won’t open a CD just to take out a loan against it.
• CD is locked: Your CD remains collateral, preventing early withdrawals.

Can I Use a CD Loan to Build Credit?

Yes, a CD loan can help build credit. The loan and your monthly payments can be reported to credit bureaus, improving your credit mix and payment history. However, missed payments can negatively impact your credit scores. Check with your bank or credit union to see which credit bureaus they report to.

How to Apply for a CD Loan

Follow these steps to apply for a CD loan:

1. Check availability: Verify if your financial institutions offer CD loans and their terms.
2. Calculate costs: Compare early withdrawal penalties and lost interest earnings to the total cost of the CD loan.
3. Follow application instructions: Submit required information and agree to a hard credit inquiry.
4. Review repayment instructions: Some lenders offer interest rate discounts for automatic payments from an account at the same institution.

CD-secured loans provide a lump sum, but some banks and credit unions also offer CD-secured personal lines of credit for more flexible funding options.

Improve Your Credit to Expand Your Options

A higher credit score can help you qualify for more loan types, including unsecured personal loans with lower interest rates. Check your FICO® Score for free with an Experian account and use their comparison tool to find and compare personal loan offers based on your credit profile.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you with the best mortgage solutions tailored to your needs.

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