What Is a CD Loan?

A CD loan is a type of secured personal loan that allows you to borrow against funds you’ve invested in a certificate of deposit (CD). You can use this loan for anything, including paying off debt, tackling a home renovation or covering large expenses, such as college tuition.

However, CD loans likely won’t be a good fit for all borrowers. Here’s what you need to know before getting started.

What is a CD loan?

Also known as a CD-secured loan (or a certificate-secured loan in the case of nonprofit credit unions), a CD loan is a form of personal loan backed by a certificate of deposit (CD). In this case, the CD acts as collateral, giving you access to more lenient eligibility requirements and more affordable interest rates than a traditional unsecured personal loan.

However, because the loan is secured by the funds in your CD, that amount in your CD often acts as your borrowing limit, although some institutions may lend you up to a certain percentage above that limit. In addition, if you decide to stop making payments on your CD loan, the lender will have the right to seize your CD funds as a form of repayment.

Pros and cons of a CD loan

Like any financial product, CD loans come with a few considerations. Here’s what you should factor in before applying.

Should you get a CD loan?

CD loans offer many benefits, but they aren’t right for every borrower. Let’s take a look at some signs that it may be worth taking out a CD loan and that you may benefit from considering other options.

3 signs a CD loan may be right for you

1. You’re unable to get approved for other financing: If you have poor credit or a limited credit history, it can be difficult to get approved for more traditional forms of financing, such as an unsecured personal loan. However, you may have an easier time getting approved for secured loan products, including a CD loan.
2. You want to avoid early withdrawal penalties: It’s possible to pull money out of a CD early, but you’ll likely face early withdrawal penalties. You can use our early withdrawal penalty calculator to estimate how much you could be charged. But if the penalty is steep, borrowing against the funds in your CD can be a more affordable option.
3. You want to build credit: Payments on CD loans are typically reported to the credit bureaus. If you can keep up with your payments, repaying a CD loan could help you start to build a solid credit history.

2 signs a CD loan may not be the right fit

1. You don’t have a CD: For a CD loan to work, you need to have a CD to borrow against. If you haven’t opened and funded a CD yet, this type of financing will likely not be an option for you.
2. You have other forms of funding available: If you have other forms of financing, such as a personal loan, you may want to consider using those options instead. You’ll likely have an easier time finding available lenders. Plus, you won’t have to put an asset at risk.

Alternatives to a CD loan

If you decide that a CD loan isn’t the right choice for you, consider these alternatives instead:

Tap your savings

The best option is almost always to pay in cash so you can avoid the cost of borrowing money. If you've already got cash or an emergency fund, it’s wise to use that instead. If not, look into selling some belongings or picking up extra work on the side to cover your expenses without taking out a loan.

Get an unsecured loan

If you have to resort to a loan, you could also consider an unsecured loan. While these products are more difficult to qualify for and tend to come with higher interest rates, they might be a reasonable option if you have good credit. As with a CD loan, consider whether it’s cheaper to take a CD early withdrawal penalty than to pay interest on an unsecured loan.

Use a credit card

Credit cards come with high interest rates, so they’re generally not preferable to loans. However, if the expense you need to cover is something you can pay back quickly, a credit card could be useful. The best option is to pay off your credit card statement in full before it’s due to avoid interest fees. However, if you need a little more time and have good credit, you could look into a low-interest or 0% introductory APR credit card.

No-penalty CD

If you’re interested in taking advantage of the higher interest rates that CDs offer but worried that you might need to make an early withdrawal to cover an unexpected expense, you could consider a no-penalty CD. These CDs might not offer the highest rates available, but they’re still generous, and you can withdraw your money without penalty.

How to get a CD loan

The process for taking out a CD loan is similar to applying for other forms of financing. Here’s an overview of what to expect:

1. Decide how much you need to borrow. First, decide how much funding you’ll need. Here, you may be limited to borrowing up to 100% of the amount of your CD.
2. Apply for the CD loan. Often, you can fill out an application online or over the phone. However, you may also be given the option to visit a branch in person. As part of the application process, the lender may evaluate your income and credit score.
3. Review the loan terms. With CD loans, the loan term is often equal to the CD’s maturity date, and the loan amount may be the same as the amount in your CD. However, be sure to review any paperwork from the lender to ensure the terms make sense to you.
4. Accept the loan. If everything looks good and you don’t have any questions, sign the paperwork to accept your loan. After that, you can wait for your funds to be distributed.
5. Start making regular payments. Once you receive the funds, plan to make payments on your loan on schedule.