A CD loan is a secured personal loan that allows borrowers to access money from their certificate of deposit to make payments for debt consolidation, emergencies, or other purposes. However, only people with a CD have access to this method of borrowing. Following this, a certificate of deposit (CD) is normally offered by credit unions and banks.
What’s more, it has similarities to a savings account. So, over a particular period, usually from 6 months to 5 years, it pays interest. Contrary to a normal savings account, with a CD, if you can make a withdrawal before your selected terms expire, there might be a costly penalty. In other words, if you are looking for short-term gains, CD is not a good option for you.
In addition, if you create a CD with a 3-year term, the money will stay in the account for 3 years. After the 3 years are over, your CD will grow, and you can renew another term or choose to withdraw the funds. It all depends on what you want. However, if you do not notify your credit union or bank about your plans for your CD, it will be renewed automatically.
How Does It Work?
As mentioned earlier, a certificate of deposit is a savings account that is usually offered by credit unions and banks. Unlike a normal savings account, this account type comes with a higher interest rate, and in exchange for the high interest rates you pay, you will leave the money over time in the account without touching it.
However, if you fail to adhere to this term and proceed to withdraw before your CD matures, you will get a penalty. So, a CD loan allows borrowers to apply for a personal loan while using their CD as collateral. If you fail to pay back the loan, your lender has the right to withdraw the funds from the certificate of deposit account.
Unlike credit cards and unsecured personal loans, the CD-backed-up loan has lower interest rates. Nevertheless, if you are trying to repair or build your credit score, this type of loan will work to your advantage.
Pros and Cons of a CD Loan
CD loans, just like other loan types, come with drawbacks as well as benefits that help you decide whether or not you would like to apply. Here are some of the pros and cons of a CD loan.
- Fast approval process.
- Lower interest rates.
- Liquidation is not required.
- Long repayment terms.
- It can help you build your credit score.
- Constant growth.
- Earn interest.
- Easy to qualify for.
- Limited loan amount.
- Not accessible in all financial institutions.
- You might lose your CD.
- Possible penalties.
- You need to have a CD to qualify for this loan type.
- Cash-out issues and complications.
- Lenders may impose some fees.
- If you cannot pay back the loan, you will lose the money.
- Inability to access funds.
Who Are CD Loans Suitable For?
Not everyone can qualify for or need a CD loan. Firstly, if you have a CD and you are looking for urgent cash, then you can consider choosing CD loans. You can also qualify if you do not have investments or savings to use as collateral. Thirdly, if you are unable to qualify for an unsecured personal loan, you can apply for a CD loan.
Fourthly, if you are trying to improve your credit score and have no access to a credit card, this type of loan is a great option. Fifthly, a CD loan is best for you if you need emergency funds before your CD matures.
Can I Use It to Build My Credit?
Many borrowers are curious about whether they can use a CD loan to build and improve their credit scores. So, here is the answer you are all looking for. CD loans will help you build your credit if you wisely use them. Besides, it offers low interest rates and low risk, making it the best choice for people who are rebuilding their credit. However, when you use this type of loan to build your credit, it is only effective when you make your payment on time and in full.
How to Apply for a CD Loan
Applying for a CD loan is very straightforward, and the process is less complicated. Moreover, the application procedure is very similar to other types of personal loans. Follow these basic steps to begin:
- Inspect and review your credit score.
- Compare the CD loan terms you come across.
- Put together and collect all the necessary information and documents.
- Begin and complete your application.
After you put together all the important documents and provide them during your application, submit them for approval after they have been reviewed.
Alternatives to CD Loans
You can turn to many alternatives if you do not want to use or apply for a CD loan. Moreover, if your bank does not offer this type of loan, here are a few options that you might want to explore:
- Secured credit cards.
- Unsecured loans.
- Short-term personal loans.
- Savings-secured loans.
- A share-secured or passbook loan.
- 0% APR credit card.
If you can meet the eligibility criteria and qualify for any of these loans, you do not need to apply for a CD loan anymore.