Can You Borrow Against a CD? How It Works

Certificates of Deposit (CDs) serve as a common savings tool, allowing individuals to deposit a fixed sum of money for a predetermined period. In exchange, the CD earns a fixed interest rate, providing predictable returns over its term. While CDs offer a secure way to grow savings, the funds are typically held until the maturity date. This fixed arrangement often leads to questions about accessing the deposited money sooner, particularly whether one can borrow against the CD.

CD Loans Explained

It is possible to borrow against a Certificate of Deposit through a CD-secured loan, sometimes called a passbook loan. In this arrangement, your existing CD acts as collateral for the loan, providing security to the lending institution. The financial institution that holds your CD typically offers this type of loan.

The loan amount is usually a percentage of the CD’s principal value, commonly 75% to 95%. Your CD continues to earn its original interest rate throughout the loan term. The loan’s interest rate is typically slightly higher than the CD’s earning rate. Repayment structures vary, often involving amortized monthly payments or a single balloon payment at the loan’s conclusion.

Factors to Consider

Before opting for a CD loan, evaluating several financial considerations is important. A primary factor is the interest rate differential, which represents the net cost of borrowing. The interest rate on your CD loan will be greater than the interest rate your CD is earning, and this difference indicates the actual expense. While your CD continues to accumulate interest, the cost of the loan will reduce the overall net gain from your CD during the period the loan is outstanding.

Comparing the cost of a CD loan to the potential penalty for early withdrawal from the CD is also crucial. For shorter CD terms, an early withdrawal penalty might involve forfeiting three months’ interest, while longer terms, such as a five-year CD, could result in a penalty of 12 months’ interest. A CD loan might be a more cost-effective solution than incurring such penalties, especially for short-term liquidity needs. Furthermore, financial institutions typically lend only a percentage of the CD’s value, not the full amount.

CD loans, while secured, may still appear on your credit report. Timely repayment can positively influence your credit history. Conversely, failing to repay the loan can negatively impact your credit score, as the financial institution may seize the CD to cover the outstanding debt. Understanding the specific repayment terms and the consequences of default is therefore essential to manage your financial obligations effectively.

Exploring Other Options

When immediate funds are needed, other options might be more suitable. An early CD withdrawal involves breaking the CD before its maturity date. This action typically incurs a penalty, such as the forfeiture of a certain number of months’ interest, and results in the full liquidation of the CD.

Unsecured personal loans do not require collateral but usually come with higher interest rates than secured loans due to increased lender risk. The availability and terms of personal loans are heavily dependent on the borrower’s creditworthiness. Credit cards offer quick access to funds, but they are generally not recommended for substantial or long-term borrowing due to their high Annual Percentage Rates (APRs).