You can typically borrow between 80 and 95 percent of your certificate of deposit’s value, and some banks will lend up to the full balance.1Bankrate. What Is a CD Loan and How Can I Apply for One? So the question of how much you can borrow against a CD comes down to two things: your bank’s loan-to-value cap and the size of the CD you’re willing to pledge. The rate you’ll pay usually sits 2 to 3 percentage points above what the CD itself earns.2Experian. What Is a CD Loan?
What Sets the Maximum
The ceiling is the bank’s loan-to-value policy applied to your CD’s current value. On a $10,000 CD at a bank that caps borrowing at 90 percent, the most you could borrow is $9,000. At an institution that goes to 100 percent, the full $10,000 is on the table.
A few things can pull that number down. A CD close to maturity may qualify for a smaller percentage, because the bank has less time to recover funds if something goes wrong. Most lenders also require the CD to already be held at their institution — you generally can’t open a CD at one bank and borrow against it at another.
Once the loan is approved, the bank freezes the pledged portion of the CD.1Bankrate. What Is a CD Loan and How Can I Apply for One? You can’t withdraw those funds or close the CD until the loan is fully paid off. The principal stays locked in and keeps earning at its original rate the whole time.
What the Loan Costs
Lenders price these loans by adding a fixed spread on top of the CD’s yield. That spread runs 2 to 3 percentage points in most cases.2Experian. What Is a CD Loan? A CD paying 4.5 percent would produce a loan rate of roughly 6.5 to 7.5 percent. The spread can widen depending on the lender or your credit profile, but the resulting rate still tends to sit well below an unsecured personal loan (often 10 to 15 percent) or a credit card (commonly 20 percent or more).
Your real cost is the gap between what you pay on the loan and what you continue to earn on the CD. On a $5,000 loan at 7 percent against a CD earning 4.5 percent, the effective cost is roughly 2.5 percent a year. Ask whether the spread is fixed for the life of the loan or adjustable before you sign.
Loan vs. Cashing the CD Out
Breaking a CD early is simpler but usually costs more. Early withdrawal penalties on a one-year CD typically run about three months of interest; on a five-year CD they can exceed eight months. You also lose the deposit’s future earnings once it’s gone.
A CD-secured loan avoids that penalty. The deposit stays in place and keeps earning, and you repay over time. For short-term needs — bridging a paycheck, bonus, or tax refund — the net loan interest is often less than the early withdrawal penalty. For longer borrowing, compare total loan interest against the penalty plus the earnings you’d forfeit.
Fees and Required Disclosures
CD-secured loans are usually low-cost, but some lenders charge an origination fee, either flat or as a percentage of the loan. Percentage-based fees are typically deducted from the proceeds at funding, so you receive less than the approved amount. Ask about origination, application, and annual maintenance charges before committing.
Federal law requires the lender to spell out the cost before the loan is finalized. Under the Truth in Lending Act, the lender must disclose the annual percentage rate, the total finance charge in dollars, the amount financed, and the total of all payments.3Office of the Law Revision Counsel. 15 USC 1638 – Transactions Other Than Under an Open End Credit Plan Regulation Z sets out how each figure must be calculated and presented.4eCFR. 12 CFR 1026.18 – Content of Disclosures Compare offers by APR rather than the stated interest rate, since APR captures fees rolled into the loan.
Repayment and What Happens If You Default
The loan term often lines up with the CD’s maturity date, so both obligations wrap up around the same time. Some lenders offer interest-only payments with a lump-sum payoff at the end; others use traditional monthly installments covering principal and interest.
If you stop paying, the lender can seize the pledged CD to cover the outstanding balance.1Bankrate. What Is a CD Loan and How Can I Apply for One? Banks have a legal right of offset that lets them apply your deposit directly against an unpaid loan at the same institution. If the CD matures while you still owe money, the bank takes what it’s owed from the matured funds and returns any remainder. A default can also be reported to the credit bureaus.
Don’t Pledge an IRA-Held CD
If your CD is inside an Individual Retirement Account, it can’t safely be used as collateral. The IRS treats pledging any portion of an IRA as security for a loan as a taxable distribution of the pledged amount.5Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts The pledged amount is added to your gross income for the year, and if you’re under 59½ you may also owe a 10 percent early distribution penalty on top of regular income tax. This applies even though you never actually withdrew the money; the act of pledging is enough to trigger it.
CD-secured loans work only with CDs in regular taxable accounts, not IRAs, Roth IRAs, or other tax-advantaged retirement accounts.6Internal Revenue Service. Retirement Topics – Prohibited Transactions If the only CD you have is in a retirement account, look at an unsecured personal loan instead, or weigh an outright IRA distribution with the tax consequences in full view.