Certificates of deposit are among the most secure investments on the market. Because they are insured by the federal government and because they have a slightly higher interest rate than a traditional savings account, CDs are generally considered a good step toward investing in your own financial security.
One of the drawbacks to investing your money in a certificate of deposit, however, is that your money can be tied up for a long period of time while you wait for the CD to mature — for one year, three years, five years or even 10 years. If the roof on your house collapses, or your child needs expensive dental work, you won’t be able to liquidate this asset without paying substantial closing penalties for early CD withdrawal.
Borrowing Against a Certificate of Deposit
Even though you might not want to withdraw from your CD, there are other ways to have your money work for you if you do find yourself in a financial pickle and need cash quickly. For instance, it’s possible to use your CD as collateral for a loan.
Some banks will give you a loan against your CD as long as you have the money on deposit at that financial institution. Typically, a financial institution can lend up to 100 percent of the value of your CD principal, and the length of the loan can be as long as the term on the CD. Talk to your bank about the details before you sign anything and always try to only take out what you need — don’t take the entire amount offered just because you can. You still have to pay it back.
Taking Out a Loan Against a CD
It might seem counterintuitive to take out an interest-bearing loan against an interest-bearing CD. However, there can be sound financial reasons for doing so. One reason might be to improve your credit score by making a series of on-time payments on a secured loan. If you establish a good payment history, taking out a loan against your CD can be a good alternative to obtaining a secured credit card and will help improve your score with the three credit bureaus.
Also, although it’s unlikely that your loan interest will be less than your CD interest — it’s typical for a loan rate to be higher than the yield on a CD — it could be worth it if you have a high-interest CD that bears substantial penalties for early withdrawal. Talk to your financial institution about what it’s able to do for you, or check out other current CD rates.
Jose Vazquez contributed to the reporting for this article.