How a CD Loan Works: What You Need to Know

It might be easier to qualify for a CD loan than a personal loan, but you have to determine whether the potential fees and interest rates are worth it.

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Updated June 7, 2024
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Some financial institutions allow you to borrow money if you use an existing certificate of deposit (CD) balance to secure the loan. This is called a CD loan.

It’s an uncommon type of loan that not all banks or credit unions offer, but it could be worth considering in the right circumstances. For example, if your credit isn’t good enough to qualify for other types of loans or if you want a lower interest rate.

Let’s explore what a CD loan is, how it works, and whether it’s the right move for you.

In this article

What is a CD loan?

A CD loan is a secured personal loan. That means that if you stop paying the loan, the bank will use your CD to pay off your loan. The CD serves as collateral. Even if your credit isn’t the best, it could be easier to qualify for this type of loan than an unsecured loan.

Note that a secured loan is any loan that requires you to offer collateral as part of the terms. Common types of collateral include houses, vehicles, and cash. Mortgages and car loans are examples of secured loans.

Unsecured loans aren’t secured by a form of collateral and solely rely on your promise to repay the borrowed money. These types of loans tend to have higher credit requirements because they’re riskier for lenders. Unsecured credit cards and student loans are common forms of unsecured loans.

How does a CD loan work?

You have to apply for a CD loan like you would most other loans and see if you qualify. The qualification credit requirements tend to be less strict since it’s a secured loan (you’re offering your CD balance as collateral).

If you’re approved, you’ll receive a loan amount that is typically the same as or less than your CD balance. There could be upfront fees for the loan, and you’ll be responsible for paying interest on the remaining loan balance and making regular payments.

Let’s say you borrow $10,000 with a 48-month CD loan that has a 3.90% APR. This can vary by lender, but your estimated monthly payment could be around $225.30.

In this example, you would have quick access to some funds and the opportunity to build your credit history as long as you make on-time monthly payments of $225.30.

Pros and cons

Pros
  • Less strict credit requirements
  • Low interest rates
  • Could help build your credit
Cons
  • Might end up costing more
  • Can’t access CD funds
  • Limited by CD balance

Pros of a CD loan

  • Less strict credit requirements: There’s less risk for lenders because you’re using an existing CD balance as collateral. That typically means you can qualify with less-than-stellar credit.
  • Low interest rates: CD loans tend to have better (lower) rates compared to unsecured loans and credit cards, helping you save on interest while borrowing money.
  • Can help build your credit: Making full and on-time loan payments can help you build your credit history and increase your credit score.

Cons of a CD loan

  • Might end up costing more: Taking out a CD loan and paying interest and potential fees could cost more than paying an early withdrawal fee on your CD balance. This won’t be the case in every scenario, but it makes sense to go through the calculations to see which option makes the most sense for you.
  • Can’t access CD funds: Your CD balance is used as collateral, so you wouldn’t have access to these funds while the CD loan is open.
  • Limited by CD balance: It varies by lender, but you typically can’t borrow more money than you have in your CD account. In some cases, you can borrow only up to a certain percentage of your balance.

More on early withdrawal penalties

Early withdrawal penalties typically cost a certain amount of interest earned. For example, at Wells Fargo, the penalty for an early withdrawal of a 24-month CD is 12 months’ interest. So you would need to determine how much that would be and compare it to the interest you would pay on the loan.

Your bank or credit union should be able to give you exact numbers for both the cost of your loan and the early withdrawal penalty. If the early withdrawal penalty costs less than what you would pay in interest on the loan, it’s likely best to just withdraw the funds from your CD and use them for whatever you were planning to use the CD for.

Who is a CD loan best for?

A CD loan could make sense if:

  • You have enough credit history to qualify
  • You have an existing CD account
  • The loan fees and interest charges are lower than paying an early withdrawal fee
  • You want a low interest rate
  • You want to build your credit history

A CD loan might not make sense if:

  • You have a low CD balance
  • You don’t have an existing CD account
  • The interest rate isn’t lower than other available loan options
  • The loan fees and interest charges are higher than paying an early withdrawal fee
  • You think you might need to access your CD funds soon

Alternatives to CD loans

CD loans could be a good option, but they don’t make sense in every situation. Here are some alternatives to CD loans for you to consider:

  • Secured credit cards: Most secured credit cards require a security deposit in exchange for a lender offering you some credit. You don’t typically need anything more than average credit to qualify, but your available credit could be low and is often tied to your security deposit amount.
  • Unsecured personal loans: These loans don’t require you to use collateral, such as a CD account, house, or car. Rather, the qualification requirements revolve around your credit history, credit score, and general finances. Credit score requirements vary by lender, with some having lower general requirements than others. Here are some lenders to consider if you’d like to check out this option.
  • Savings-secured loans: This type of loan uses your savings as collateral. That could include using a CD balance or a savings account balance.
  • Home equity loans or HELOCs: A home equity loan uses the equity in your home as collateral, while a home equity line of credit (HELOC) does the same thing but gives you an open line of credit, similar to a credit card, instead.
  • 401(k) loans: A 401(k) loan borrows money from your existing 401(k) retirement account. You don’t have to pay taxes and penalties on this type of loan and any interest you pay goes back into your retirement account.

Whether a CD loan makes sense for you or not, it’s still worth considering certificates of deposit as good savings vehicles. If you have enough money and time to spare, the right CD could help grow your savings much quicker than some savings and checking accounts.

For example, Blue Federal Credit Union offers a generous 4.70%1 APY on a 15-month share certificate. You have to be a member to use this offer, but joining is as easy as donating $10 to the Blue Foundation.

Blue Federal 15-Month CD - 4.70% APY1

Certificate of Deposit. $1 minimum deposit. FDIC Insured.

Open Account

With CIT Bank, you don’t have to worry about credit union membership, and you can take advantage of a 6-month CD with a solid 3.00% APY. Your deposit is backed by FDIC insurance and your interest compounds on a daily basis.

CIT Bank 6-Month CD - 3.00% APY2

Certificate of Deposit. $1,000 minimum deposit. FDIC Insured.

Open Account

FAQs

How much can you borrow against a CD?

You typically can’t borrow more than the amount you have in your CD account. However, this depends on the loan. In some cases, you might only be able to borrow up to a percentage, such as 80%, of your CD’s balance.

Are CD-secured loans a good idea?

They could be a good idea if you want to avoid high interest rates and have an existing CD account. CD-secured loans often have better APR rates than unsecured loans and credit cards. You might also have an easier time qualifying for a CD loan compared to an unsecured loan because you’re using your CD balance as collateral.

What is the biggest negative of putting your money in a CD?

You generally have to pay a penalty for early withdrawal, which means CDs provide less liquidity than most savings and checking accounts. If you’re not sure whether you can afford to let your money sit in a CD account until its maturity date, you might want to consider another interest-bearing option, such as one of the best savings accounts.

Bottom line

CD loans could make sense if you have an existing CD account and want to avoid high interest rates and borrowing costs. But be sure to calculate whether paying the potential loan fees and interest charges would be lower than paying an early withdrawal fee.

If a CD loan doesn’t seem like the right fit for you, use our list of the best banks to compare other lending options.

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Author Details

Ben Walker, CEPF, CFEI®

Ben Walker, CEPF, CFEI®, is credit cards specialist. For over a decade, he's leveraged credit card points and miles to travel the world. His expertise extends to other areas of personal finance — including loans, insurance, investing, and real estate — and you can find his insights on The Washington Post, Debt.com, Yahoo! Finance, and Fox Business.