What Is a CD-Secured Loan?

A CD secured loan is one that requires you to use a certificate of deposit (CD) as collateral. If you take one and don't pay, you risk losing that CD.

Let's dive into how secured CD loans work, their pros and cons, and alternative options you may want to consider.

What is a CD secured loan?

Consumers often use CDs to save money for both short-term and long-term purposes. However, some banks and credit unions allow CD holders to borrow money from a CD through a CD-backed loan. Basically, a CD secured loan is a type of personal loan that requires you to place a CD as collateral.

How a CD-Secured Loan Works

If you own a CD and your financial institution offers CD-backed loans, you can borrow with the funds you have already saved. You will be able to do this without being subject to early withdrawal penalties. A loan secured by a CD can help you build credit, consolidate debt, cover a home improvement project, or pay other expenses.

The fees and loan amount vary from bank to bank. Howard Bank, for example, allows you to borrow up to 95% of what is on your CD with a maximum repayment term of five years. If you have a $ 2,000 CD, Howard may be able to approve you for a loan of up to $ 1,900 (95% of your CD balance).

If you default on the loan, the bank or credit union can use the money on your CD to cover the loan payments. If this happens, you will likely pay the CD early withdrawal penalty.

Regardless of which lender you choose, you will likely pay off your CD-backed loan through fixed monthly payments based on the number of months you have to pay off the loan and your interest rate, which you can review before accepting the loan.

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

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

Pros and Cons of CD-Secured Loans

Like all financial products, CD-backed loans have their own advantages and disadvantages.

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 are backed by money you have already deposited and pose less risk to creditors.
  • Predictable Payments: Once you get a CD loan, you will repay it through fixed payments that can be planned in advance.
  • You Can Increase Your Credit: If you want to increase your credit and can't get approved for a credit card or other loan, a CD loan can help you do just that. Your lender will likely report your payments to the major credit bureaus.

Cons Explained

  • Mandatory CD:A CD secured loan is not an option unless you already have a CD or are willing to open one.
  • Not Available Everywhere: If you're interested in a CD-backed loan, your bank or credit union may not offer it. You won't be able to find these financing solutions at some larger banks like Chase and Bank of America.
  • CD Funds Pledged Over the Life of the Loan: Since your CD is used as collateral for your loan, you will not have access to these funds until the loan is paid off.

Alternatives to CD Loans

If you think a loan secured by a CD is not right for you, you might consider a loan secured by stocks, a secured credit card, or a short-term loan from a bank:

  • Stock-Guaranteed Loan: Some credit unions offer "stock-guaranteed loans." These loans use your savings account as collateral and, like CD-backed loans, tend to offer competitive interest rates. Consumers Credit Union and Alliant Credit Union are examples of credit unions that offer equity-backed loans.
  • Secured Credit Card: A secured credit card is one way to build your credit history if you don't want to do it through a CD loan. Make a deposit, which works like your credit limit, and improves your credit by making payments on time.
  • Short-term loan from a bank: U.S. Bank offers small loans with simple terms. You can borrow up to $ 1,000, which you must repay in three months with fixed payments. Fees are $ 12 for every $ 100 borrowed. Although the terms are easy to understand, interest rates tend to be higher than normal.

Enjoy Watching This Video About Loans

Source: Rocking Finance

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