What is a CD loan?

Quick insights

• Certificate of deposit (CD) loans are a type of secured personal loan in which the borrower puts up a CD as collateral.
• With a CD loan, a borrower cannot access the funds in their CD until the loan is paid off.
• There’s typically no penalty for paying off a CD loan early.

CDs allow account holders to earn interest on savings, but the funds may not be immediately accessible. To avoid a penalty, the account holder must wait until the CD reaches the end of its term to withdraw the money. For those who need access to the funds before the CD matures, a CD loan may be a suitable option.

Read on to learn more about how CD loans work.

The basics of CD loans

A CD loan is a type of secured personal loan that is backed by a borrower’s CD. Secured loans require collateral, and with a CD loan, the collateral is a CD. Borrowers typically apply for this type of loan when they:

• Don’t want to withdraw funds from a CD due to the early withdrawal penalty that CDs often charge.
• Are unable to qualify for an unsecured loan (a loan without collateral).
• Prefer the terms offered by a CD loan over other loan types.

CD loans generally offer better terms than unsecured loans or credit cards due to the reduced risk for lenders. If the borrower defaults, the lender can use the funds in the CD account to cover the loan balance.

How CD loans work

Here are the different steps to getting and repaying a CD loan:

• Compare CD loans: Review the rates and terms of the available CD loan options. Borrowers usually can’t borrow more than the amount of their CD.
• Submit the loan application: Apply through the lender’s website or at a branch location. Borrowers may need to provide information like their social security number and submit documents like an ID, proof of income and employment.
• Receive the loan: Upon approval, the funds could arrive in as few as one to two days. The funds in the borrower’s CD are locked until the end of the loan, but the CD will continue to accrue interest earnings.
• Pay off the loan: The borrower pays back the loan in monthly installments. The loan term often aligns with the CD’s maturity date. After the CD loan is paid and the CD matures, the borrower may access the funds in their CD without an early withdrawal penalty.

It’s possible that the interest paid on the loan will be higher than interest earned on the CD. For some borrowers, a CD loan is still less expensive than withdrawing funds early from their CD or getting an unsecured loan or a credit card.

CD loan terms vary. Check the CD loan’s terms for exact details.

Evaluating CD loans

Here are the potential advantages and disadvantages of a CD loan:

Advantages

• Applicants who may not qualify for other loans may still be eligible for a CD loan.
• The interest rates for CD loans tend to be more favorable than unsecured loans. Review the specific loan product for exact rates and terms.
• The CD continues to earn compounding interest throughout the loan term.
• The account holder gets access to funds while avoiding the early withdrawal penalty on their CD account.
• If your CD account and CD loan are through the same bank, you may find that you get the funds relatively quickly. Some banks are able to deposit funds the same day the CD loan is approved.

Disadvantages

• The bank will use the CD to pay off any remaining debt if you default on the loan.
• You could have to pay an origination fee on the loan.
• Funds in the CD are typically inaccessible for the duration of the loan.
• CD loan options may be limited, as not all banks offer them.
• You can only borrow up to the CD amount in many cases.

Paying off a CD loan early

You can usually pay off a CD loan early. A prepayment penalty typically doesn’t apply for CD loans, but check your loan terms for exact details. Paying off the CD loan early could result in interest savings, and you can generally regain access to the funds in the CD. Note that the early withdrawal penalty still applies if the CD hasn’t yet reached the maturity date.

In summary

If you need funds but your savings are locked in a CD, a CD loan is one potential option. CD loans require borrowers to use their CD as collateral. That means the lender can use the funds in the borrower’s CD to pay off the loan balance if the borrower defaults. Additionally, the borrower cannot access the funds in the CD until the loan is paid off.

Because this loan is considered less risky for the lender than an unsecured loan, CD loans tend to offer more favorable terms. CD loans may offer lower borrowing costs compared to unsecured loans or credit cards. Borrowers can regain access to the funds in their CD once the loan is paid off, and paying the loan off early generally means fewer interest charges.