The appeal of a CD secured loan is easy to see: easy approval, quick cash and lower interest rates than other personal loans.
But these loans are not quite as easy as they might seem. So make sure you know what you are getting yourself into before signing the dotted line.
If you own a CD and are considering taking out a CD secured loan, here are some things you should know.
Is A CD Secured Loan Right For You?
The main reason you should consider getting a CD loan is to improve your credit score. Banks are more likely to approve the loan because they already hold your collateral – your CD. So, according to Justin Pritchard, a certified financial planner with Approach Financial in Montrose, Colorado, they’re not so worried about defaulting or stopping payments.
Taking out a CD backed loan and making payments on time can increase your credit score and improve your credit score. Good credit can help you, for example, with applying for a credit card, financing a car, using cell phone service, and buying or renting a house.
But if you don’t need to build up credit, a CD-backed loan is “a better deal for the bank because they’ll charge you a higher interest rate than you pay for the CDs,” says Pritchard.
By paying more interest on the loan than you get back on the CD, you are essentially paying the bank to improve your credit score. If this is your goal, it is best to keep your credit as small as possible.
Pro tip
Construction loans are important if you expect to get credit relatively soon. For example, if a CD-backed loan could give you a better mortgage rate, it might be worth it.
For example, if you earn 1% on a one-year CD and you are billed 4% on a loan, you pay that 3% difference to the bank as interest. If you took out a $ 500 loan, your cost would be 3%, or $ 15 over the course of a year. And that’s instead of making $ 5 on the CD with the same amount. If you are looking for a worthwhile cost to improve your credit score, then a CD loan could be worthwhile for you.
“A $ 500 loan shouldn’t do much damage to your finances,” says Pritchard. “The goal here is not to get a substantial amount of money, but to improve your creditworthiness while avoiding expensive debts or robbery loans.”
Loan creation loans, like CD-backed loans, can be helpful for people looking to build a credit history, according to Ted Rossman, an industry analyst at CreditCards.com.
“Credit scoring systems like to see that you’ve successfully managed different types of credit,” Rossman says. Reconstruction loans can diversify your credit history and add a more positive payment history to your borrowing.
How much your credit can gain from taking out a CD backed loan is difficult to tell and depends on your credit history, but on-time payments are reported to the credit bureaus so “you improve your credit score with each successful payment”. says Pritchard.
Where can I get CD credit?
Not all banks that have CDs offer CD-backed loans, and many large banks do not offer CD-backed loans at all. If you have a CD with a financial institution, a quick search on the company’s website should tell you whether or not you can get a loan secured by that CD.
Banks that offer CD-backed loans are likely to offer better interest rates than other unsecured personal loans, which vary widely based on factors such as creditworthiness, loan amount, and repayment period. For example, Wells Fargo offers an unsecured personal loan of 5.74% to 20.24% compared to a CD or savings secured loan with an interest rate of 5.25% to 13.54%.
Other Things You Should Know About CD Secured Loans
You are secured
With a CD secured loan, your CD is used as collateral, which means that the lender can confiscate the money on your CD if you disagree with the loan. Loan amounts can vary from $ 1,000 to $ 250,000.
They have quick processing
CD-backed loans tend to be processed pretty quickly, says Dabney Baum, a financial advisor at Baum Wealth Advisors at Janney Montgomery Scott in Boston. CD loan approval is often faster than other loan types because the bank already holds your security – the CD.
They can be easier to come by than other loans
Approval for these loans is usually a little easier than other types of personal loans because the bank already holds your collateral.
If you’re struggling to get other types of loans, getting a CD-backed loan can “improve your chances dramatically,” says Pritchard.
Bottom line
When considering a CD secured loan, it is important to consider whether the borrowing of the money makes sense for you and to have a repayment plan.
“This strategy is likely not optimal financially unless you’re trying to build up credit,” says Pitchard.
