What Is a CD Loan?

What Is a CD Loan?

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A CD loan is a type of secured personal loan that uses your certificate of deposit as collateral. If you default on a CD-secured loan, the bank can take the money in your CD.

Interest rates for this type of loan tend to be lower than with your typical personal loan. They can be a good option if you already have money in a CD and need quick cash for a short-term emergency or if you’re looking for a simple way to build credit history.

What is a certificate of deposit?

A certificate of deposit, or CD, is a type of savings account that earns interest on a fixed amount of money you stow away for a specific period of time, such as six months, a year or longer.

When you open a CD account and deposit your funds, the issuing bank agrees to pay you interest over the predetermined period. This is represented by the account’s annual percentage yield (APY). The interest you earn is typically higher than what you’d earn with a standard savings account. Every CD has a maturity date, so if you decide to take out your money early, you’ll usually pay a penalty, like two to 12 months’ interest, depending on how long you’ve had the account.

CDs are one of the safest savings options available. If you put money into a CD at a federally-insured bank, those savings — plus any others in your name — will be insured up to $250,000. Almost anyone can open a CD, as well, by providing basic personal information and a Social Security number.

Your bank will probably set a minimum for how much money you’ll need to open a CD. The APY on your account will depend on the bank, how much you deposit, your starting rate and the length of your CD term. In general, the longer your CD term, the higher the APR.

How a CD loan works

CDs are mostly used as a savings tool, but some banks and credit unions will let you borrow against the money in an existing CD by using it as collateral. As with any personal loan, a CD loan will come with a set borrowing amount, loan length and a fixed interest rate. Your monthly payments will be fixed, too.

Like personal loans, CD-secured loans can be used to fund almost anything, whether it’s to consolidate debt, cover a major purchase or pay for emergency expenses. Depending on the bank, you may be able to borrow up to the full amount of your CD account or just a portion of it.

In general, it’s easier to qualify for a CD loan than for an unsecured personal loan. That’s because financial institutions can seize the collateral you use to back the loan if you fail to repay the debt. Because of this reduced risk on the lender’s part, you’ll find these secured personal loans are easier to qualify and can come with lower rates.

CD loan: Pros and cons

CD savings-secured loans offer a number of benefits. Because they’re backed with funds you already have, they come with significantly lower interest rates than what you might expect with another borrowing option, like a credit card or unsecured personal loan. It’s also usually easier to qualify for a CD-secured loan and your lender might approve you without conducting a credit check or insisting you meet a certain debt-to-income (DTI) ratio. You’ll likely find both requirements when applying for other types of personal loans.

If your credit is poor or you don’t have much credit history — maybe because you’re a new borrower — a CD loan might be a good way to build credit as long as long as you stay on top of payments. However, to get this type of loan, you’ll first need to have a CD account, or be willing to open one.

You’ll also need to consider fees. Besides charging interest, a CD secured loan might also come with an origination fee. If you need access to emergency funds, it might be cheaper to simply cash in your CD account and pay any necessary early withdrawal penalty. Take a look at the chart below to see if a CD loan is the best way to receive the funds you need:

Low interest ratesBorrower must already have a CD account or be willing to open one
Easy qualificationLoan costs might be higher than early withdrawal fees
Quickly accessible fundsNot all banks offer CD-secured loans
Fixed monthly payments
Can help build credit history

Is a CD loan right for you?

CD loans are relatively easy to get if you already have a certificate of deposit with your bank. However, many major banks don’t offer these loans, even though they offer CD accounts. You may find it easier to get a CD loan through a community or regional bank, or through a credit union.

Before deciding to take out a CD savings-secured loan, check first to see if cashing out your CD is actually a more affordable option.

How to apply for a CD loan?

  • Open a CD account if you don’t already have one: You’ll need a CD account at the bank or credit union where you plan to apply. Be ready to provide personal information like your name, address, contact information and Social Security number.
  • Make sure you understand terms and fees: As with any loan, check the loan’s terms and conditions, including any prepayment penalties, origination fees, the duration of the loan and the APR, which is a more accurate measure of your loan cost than just the interest rate.
  • Fill out an application: Some lenders accept online applications, while others require you to apply in person or by phone. You may not have to pay an application fee. As with any loan application, be prepared to share financial and employment information.
  • Wait for a loan decision: Some lenders may be able to approve your application within a few hours and fund your new loan within a single business day.
  • Review and sign loan documents: If your loan is approved, review loan terms again before signing and starting payments. For example, you may not be able to access any remaining funds from your CD during the life of your loan. Also, if you default, you’ll probably lose the CD money you put up as collateral.

Alternatives to a CD loan

Secured credit card
  • Can often qualify with poor credit or no credit history
  • May help you build your credit
  • May offer benefits like cash back on purchases
  • Requires a refundable deposit as collateral
  • Borrowing power might be limited by the amount of your deposit
  • Often comes with a higher interest rate than a secured card
  • Default might cause loss of deposit
Secured personal loan
  • Typically lower interest rates and higher borrowing limits than credit cards
  • Helpful in improving your credit score as long as you don’t default
  • Predictable monthly payments
  • Will put your collateral (like a car or savings account) at risk should you default
  • Possible origination fee
  • Risk of taking on debt if used to consolidate and pay off debt
Unsecured personal loan
  • No need to use personal assets as collateral
  • Faster approval process than secured personal loans
  • Best interest rates go to borrowers with good-to-strong credit
  • Higher interest rates than secured loans, especially if you have poor credit or no credit history
  • Lower borrowing limits than secured loans
  • Fees might add up to 8% of the loan amount
Peer-to-peer (P2P) loan
  • Less hassle than a regular personal loan
  • Convenience and ease of applying online
  • Generally fewer documentation requirements
  • Higher origination fees
  • Shorter-term loans
  • Greater chance you’ll need a cosigner or collateral

Secured credit card

Borrowers who have poor credit or no credit history often find it difficult to qualify for an unsecured credit card. If you don’t qualify — or don’t have a CD account to borrow against — a secured credit card might give you access to the funds you need and also help you build credit.

To get a secured credit card, you’ll need a security deposit to serve as collateral and to increase the chances of having your application approved. The amount of your security deposit will likely determine the credit limit set on your card, although a lender might require only a small security deposit. If you default on a secured credit card, your issuer will probably use your security deposit to pay off what you still owe.

Secured personal loan

A CD loan is a type of secured personal loan. However, you can also back a secured personal loan with another form of collateral, like a regular savings account, money market account, car or piece of jewelry. If you fail to make regular payments on your loan, your lender might seize whatever collateral you put up to offset what you owe.

Unsecured personal loan

Unlike a secured personal loan, an unsecured loan doesn’t require you to put up an asset as collateral. However, if you were to default, your lender would likely send your account to a collection agency and this might cause a steep drop in your credit score. If your loan were to stay unpaid, your lender could also sue you in an effort to collect.

Unsecured personal loans are riskier for lenders so they generally charge higher interest rates than for secured loans, especially for borrowers you have poorer credit. Depending on your credit, you might also see a higher interest rate than for a credit card or a savings-secured loan like a CD loan. Some loans also come with an origination fee, although many lenders no longer charge the fee. In short, you’ll need to consider possible long-term costs carefully before picking this option.

Peer-to-peer (P2P) loan

If you don’t have a CD account — or funds to open one — a peer-to-peer loan might give you a way to obtain funds with less hassle than a traditional personal loan. Peer-to-peer lending is funded by investors who use an online lending platform, so it’s a way to bypass working with a bank, credit union or online lender. The application process, however, is similar to what you’d see with a typical personal loan.

It might take more time to receive the funds you need as it can take several days for a P2P loan application to be evaluated and funded by investors. There’s also a chance your loan won’t be fully funded. Still, P2P lending is generally friendlier to borrowers who have less-than-perfect or even bad credit. In that way, it’s similar to accessing money with a CD loan.