How Much Can You Borrow Against a CD?

A certificate of deposit (CD) loan allows you to borrow money using your existing CD as security. The CD serves as collateral, providing a lender with assurance for the loan. This process enables access to funds without needing to withdraw from the CD prematurely, thereby avoiding potential early withdrawal penalties.

Understanding CD-Secured Loans

A CD-secured loan is a personal loan where a Certificate of Deposit acts as collateral. Unlike unsecured loans, a CD loan is backed by a tangible asset. This structure provides reduced risk for lenders, making these loans easier to obtain and offering more favorable terms.

You pledge your CD to the financial institution from which you are borrowing. Your CD continues to earn its stated interest, but it remains inaccessible as long as the loan is outstanding. This type of loan often comes with lower interest rates compared to unsecured borrowing options, given the security it provides to the lender.

Determining Your Borrowing Limit

The amount you can borrow with a CD-secured loan is determined by the loan-to-value (LTV) ratio, a percentage of your CD’s face value. Lenders allow borrowing between 80% and 100% of the CD’s principal balance. For instance, if you have a $10,000 CD, you might be able to borrow between $8,000 and $10,000.

The specific percentage offered can vary based on the lending institution’s policies. Factors such as the CD’s maturity date and its type might also influence this borrowing limit. The exact borrowing capacity will depend on the terms set by your bank or credit union.

Loan Terms and Repayment

CD-secured loans feature interest rates that are lower than those for unsecured loans. These rates are often a small percentage above the interest rate your CD is earning, commonly ranging from 2% to 4% higher than your CD’s Annual Percentage Yield (APY). This difference between the loan interest rate and your CD’s earning rate represents your net borrowing cost.

In addition to interest, some lenders may charge fees, such as an origination fee, which could increase the overall cost of the loan. Repayment schedules involve regular monthly installments. The loan term is often aligned with the CD’s maturity date, with common repayment periods ranging from 12 to 84 months. If payments are not made as agreed, the financial institution has the right to access the CD’s funds to cover the outstanding loan balance.

The Application Process

Applying for a CD-secured loan involves contacting your financial institution, often the one holding your CD. You can apply online, by phone, or in person at a branch. The process is straightforward because the collateral reduces the lender’s risk.

You will need to provide identification documents, such as a government-issued ID and your Social Security number. Information regarding your income and employment may be requested to verify your repayment ability. You will need to specify the CD account you intend to use as collateral. Approval can occur quickly, sometimes within a business day, and funds may be disbursed soon after.

Impact on Your Certificate of Deposit

When your Certificate of Deposit is used to secure a loan, it remains active and continues to accrue interest. However, the funds within the CD are placed on hold and become inaccessible for the duration of the loan term.

A lien is placed on the CD, giving the lender a claim to the funds. If you fail to make payments and default on the loan, the financial institution is authorized to liquidate your CD to recover the outstanding debt. This action could result in the loss of your principal investment and any accrued interest, and it would negatively impact your credit history.