What are the pros and cons of a CD loan?

 CD-secured loans might be a good idea for some, but they aren’t right for everyone. Here are some of their biggest benefits and drawbacks.

Pros of CD loans

• Easy application process: When you apply for a CD loan with a bank or credit union that holds your CD, you can often get loan approval quickly, sometimes within hours, and receive funds within a day or two.
• Continued growth: Your CD continues to earn interest throughout the life of the loan.
• Long repayment terms: Banks and credit unions usually offer generous terms, sometimes allowing you to repay funds for up to 10 years.
• Good for those with bad credit: Borrowers with poor credit often qualify for CD-secured loans.

Cons of CD loans

• Not widely available: Not all banks and credit unions offer CD-secured loans.
• Need a CD: Typically, you must already have a CD to qualify for a CD loan.
• Some fees could apply: Lenders may require an origination fee or prepayment fee for paying off the loan before the end of the term.
• Cash-out setbacks: You cannot cash out your CD until after you’ve paid off the loan

How does a CD loan work?

 Secured loans are backed by some form of collateral. For example, if you take out a mortgage to buy a new house, the house serves as collateral. Car loans work the same way. The automobile for which you obtain a loan becomes the collateral to secure the debt. When a borrower defaults on a secured loan, the lender can seize the collateral to cover the outstanding debt, which is why secured loans pose lower risks for banks and credit unions.

With a CD-secured loan, your certificate of deposit acts as collateral. CD loans allow you to retain your investment and get the additional cash you need. CD-secured loans are personal loans, meaning you can use the money for almost any expense.

What is a CD-secured loan?

 A CD loan is a type of personal loan that uses your certificate of deposit to secure the loan funds. With the certificate of deposit acting as the collateral for the loan, lenders normally offer better APRs because even if the borrower defaults on a CD loan, the lender can recoup its losses by way of the CD. However, when you back a loan with a CD, you risk losing that certificate should you fail to make payments.

What is a certificate of deposit (CD)?

 A certificate of deposit (CD) is a special kind of savings account offered by banks and credit unions. It grows in value over a specific period of time, ranging from six months to five years. But unlike a regular savings account, you can’t withdraw funds during the term you select, making a CD more of a long-term savings vehicle than one designed for short-term gains.

If you open a CD with a three-year term, the funds will need to remain in the account for that amount of time. At the end of the three-year period, the CD will mature. You’re free to withdraw the funds or renew the CD for another term and continue earning interest. You’ll typically have five to ten days to decide how to move forward once the CD matures. The CD may automatically renew if you fail to notify the bank or credit union of your intentions.

What is a CD loan?

 CD loans are secured personal loans where you borrow money from your certificate of deposit to pay for emergencies, debt consolidation or whatever else you need. If you don’t have a CD, this type of loan won’t work for you. If you do have a CD, you might want to consider this option if you need to borrow money.

Which is better for you?

Which loan type is better for you depends on your need, financial history and credit score. Since secured loans will often have lower interest rates and higher borrowing limits, they may be the best option if you’re confident about being able to make timely payments. Secured loans are also usually the best choice if you have bad credit.

With that said, an unsecured loan may be the best choice if you don’t want to place your assets at risk. Interest rates may be slightly higher, but they could still be competitive if you have good credit.

The bottom line

Both secured and unsecured personal loans can help you get the cash you need, when you need it, though there are benefits and drawbacks to both. When it comes to any type of loan, shop around with multiple lenders and compare their rates and fees to ensure that you’re getting the best rates for your financial need.

• Best personal loan rates
• What is an unsecured loan?
• How to improve your credit score with a personal loan

Borrowing limits

Due to the financial approval requirements, secured loans tend to have higher borrowing limits, which will give you access to more money.

How you can use the money

Most unsecured loans come with few restrictions on how the money will be used. As long as the loan proceeds aren’t going toward gambling, buying securities, illegal activities or, in some cases, college expenses, you’re free to spend the money as you please.

Lenders tend to approve secured personal loans for specific purposes, like buying a boat or a recreational vehicle. With these types of loans, your options may be more limited.

Requirements to qualify

If you have bad credit, some lenders may be unwilling to lend you an unsecured loan since they perceive bad-credit borrowers as riskier. With secured loans, on the other hand, credit requirements may be lower, since the borrower takes on additional risk.

What are the key differences between secured and unsecured loans?

The choice between an unsecured and secured loan impacts your approval chances, your rates and fees and the need for collateral.

Collateral

The primary difference between secured and unsecured loans comes down to collateral. With a secured loan, you give the lender the right to seize the asset you use as collateral should you fail to repay the loan. With an unsecured loan, no assets are required — though you’ll still face credit implications if you default on your loan payments.

Interest rates

Lenders take on less risk with secured loans since the borrower has more incentive to repay the loan. Because of this, interest rates are typically much lower. However, with a good credit score you will get more favorable rates for either type of loan. A good credit score is typically considered anything 670 or higher.

Unsecured loans

Unsecured loans don’t require collateral, but failing to pay on time can result in a bad credit score. Your debt can also be sent to a collection agency if you don’t pay off your loan within the terms of the lender.

Here are a few examples of unsecured loans:

• Personal loans: These are often called “term loans” or “installment loans,” because they have a fixed period of time for repayment with monthly payments made in equal amounts.
• Revolving loans: These are loans that the borrower can use and repay repeatedly. Credit cards and personal lines of credit are examples of this type.
• Student loans: Loans for college are usually made out to students with few assets and little credit history, so they don’t require collateral.

Secured loans

 Secured loans are often used for purchases that need larger loan amounts — like a home loan or an auto loan. Lenders like secured loans because they are taking less risk. Borrowers like secured loans because you can typically get lower interest rates. With good credit, you can expect rates to start as low as three percent APR.

Here are a few examples of secured loans:

• Mortgages: Mortgages require the house being purchased to be used as collateral. If the borrower is unable to repay the loan, the house can go into foreclosure and the borrower can lose the house.
• Vehicle loans: These types of loans are available for cars, trucks, motorcycles and boats. The vehicle is used as collateral. Not repaying the loan can result in the vehicle being repossessed by the lender as repayment.
• Secured credit cards: For those with limited credit history, a secured credit card can offer the chance to build your credit score. The credit card requires a cash deposit to serve as collateral, typically between $200 and $500. The amount you deposit will be your credit limit. If a monthly payment is not made, the money is taken from the cash held as collateral.

What are secured and unsecured loans?

 Secured loans are loans that require you to use some type of collateral in order to qualify for funds. In the event that you default on the loan, the lender can repossess the asset used to secure the loan to compensate for the unpaid loan funds. However, because the lender takes on less risk with a secured loan, it’ll likely charge lower interest rates.

Unsecured loans are loans that do not require any kind of collateral in order for you to qualify for funds. You’ll need a good credit score to qualify for an unsecured loan from many lenders, and interest rates may be higher.