Borrow against your CD for a low-cost loan
Putting up your investments as collateral for a loan
can be a dicey proposition. If you default, a portion or all of
your investment is gone and it can be hard to recoup.
But if you're reasonably certain repayment won't be
a problem, borrowing against your certificate of deposit can be
a flexible, low-cost way to get the loan you want.
Roberta Rohrman, branch manager at Crown Bank in Casselberry,
Fla., says she wishes her bank sold more CD loans.
"It's the most secure loan you can have, and
it maintains our good relationship with our customers. I feel we're
serving the customer best. I like to see them keep that lump sum
and not try to reaccumulate it again."
Since the CD is just used as collateral, it will continue
to earn interest during the term of the loan. Interest on the loan
usually will be 2 percent or 3 percent above the CD rate. That means
you're getting a loan for 2 percent or 3 percent plus loan origination
"Our CD loan rate depends on the dollar amount
of the loan," says Lisa Moleski, loan operations manager at
Capitol Credit Union in Austin, Texas. "Two percent above the
CD rate if the loan amount is $3,000 or more, 3 percent for a loan
One caveat; don't try to use a CD from bank A to get
a loan at bank B.
"We get calls all the time from people wanting
to pledge other banks' CDs to us," says Bob Morgan, senior
retail lending officer at Raymond James Bank in St. Petersburg,
Fla. "Most banks are now in a mode where they'll only lend
against their own CDs."
Most institutions will let you borrow up to 95 percent
of the value of the CD. Some, such as Capitol Credit Union, let
CD holders borrow 100 percent, but usually you'd need a really strong
relationship with your institution to get that.
You may find institutions discouraging loans against
CDs if the CD matures in less than one year. All institutions match
the loan to the CD.
"If the CD is a one-year, the loan runs for one
year," according to Jon Ingalls, vice president at Valley View
bank in Overland Park, Kan. "Otherwise it gets out of kilter
if the CD matures in six months and the loan is for 12 months."
You're likely to find a variety of repayment options. If you want
to receive the full value of your CD at the end of the term, it's
best to arrange to pay back principal and interest during the loan
Many banks will let you make either principal or interest
payments, but you'll have to fork over a portion of the CD when
the loan is due.
"Ours is structured as an interest-only payment,"
says Crown Bank's Rohrman. "Anything over and above pays down
the principal. We send a bill once a month for just the interest."
If you do an interest-only loan and you don't want
to lose a chunk of the CD when it matures, you can renew the CD
and the loan.
While CD loans often can be structured as a line of
credit, don't think of it as an endless source of credit, says Bob
"Lenders may be generous with renewal but it's
not meant to be an evergreen scenario. There needs to be some finality
at some point. It's in the best interest of the borrower to have
some targeted period where the loan is resolved."
If you're considering a CD loan, compare the overall
cost of the loan aganst the withdrawal penalties the CD may carry.
"There's often an interest penalty that should
be carefully compared to the net interest cost on the loan plus
any origination fees involved in the CD loan," Morgan says.
"Those fees will vary significantly by lender and by state.
We pay the state of Florida a tax on every loan, including CD loans.
Another state may not have that tax."
If you have a low-rate CD, you may fare better by
cashing it. But if you have an older CD with a high rate, think
carefully before redeeming.
CD loans can be a way to borrow money if your credit
is slightly dented. Some institutions do credit checks; many don't.
If you want to use a CD loan to polish your tarnished credit file,
ask if the bank reports repayment of a CD loan to the credit bureaus.