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What to Know When Borrowing Against a CD
Sometimes, you need money for a short term emergency, but don’t want to resort to pay day loans or a credit card. Or perhaps you need to build up your credit history so you can get a Kansas City home loan. You can easily take out a loan by borrowing against any certificates of deposit (CDs) you may have. But before you do, there are a few things you should know:
The Certificate of Deposit is Collateral
When you borrow against a CD, the CD is used as collateral for a loan so the bank has something to fall back on if you don’t pay it back. You can also borrow against the CD in the form of a credit card, which is limited to the amount of the loan. That way, you cannot spend more money than what you borrowed. If you do, the bank will be able to use your CD as a way to regain any losses.
There are Restrictions
Depending on your bank, there may be some restrictions, including:
- A minimum loan limit, though some banks will let you borrow up to 100% of the CD loan
- The loan term cannot be longer than the CD term
- You have to have bought the CD from that bank
- You have to have money deposits in that bank
- Penalty fees if you withdraw money before the end of the CD’s term
Be Smart When Borrowing
It makes sense to borrow against your CD if:
- Credit card interest rates are higher than bank rates
- Penalties for early withdrawal are higher the cost of interest
- You need short-term cash for emergencies
- You need to build your credit history and score
Interest rates on CD loans are low because they are fully secured by your own money. So borrowing against a CD for short term emergencies is typically a much cheaper option than using credit cards or a home equity line of credit. If you take out a loan on your CD to help build your credit history, you have to make your payments on time in order to see any benefits.
Always review any and all conditions of borrowing against your CD before signing any contract with your bank.