CD secured loans can be a very inexpensive means to borrow money from a bank.Â The interest rates on these loans are often some of the lowest lending rates offered by a bank.Â The reason the rates are so low is due to the security offered to obtain the loan.Â The bank extending the loan is using the CD issued by the very bank offering the loan as collateral for the loan.Â This makes the loan 100 percent covered by the value of the collateral, the CD, and since the bank is possession of the CD, the collateral is highly liquid.Â The CD loans are therefore virtually risk-free for the bank and are generally priced accordingly with very low interest rates.
CD secured loan rates will vary from bank to bank.Â There are no federal regulations that establish a maximum interest rate a bank can charge on this type of loan.Â Unless there is state usury law that sets standard for the maximum CD loan rate for banks operating in the state, banks are free to set the CD loan interest rate any way they want.
Not only are the rates on CD loans very low relative to most bank loans, but the rates are fairly consistent for all borrowers with little regard to the characteristic of the borrower or other related factors that are used to price most bank loans.Â Since CD loans are fully collateralized by the bank CD and are virtually risk free for the bank, each CD secured loan presents the same credit risk to the bank and should be priced the same way or issued at the same interest rate.Â The bank does not have to be overly concerned about the borrowerâ€™s credit or income; repayment can be made to the bank by liquidating the certificate held as collateral if necessary or in the case of default on the repayment terms.
Certificate of deposit loans or CD secured loans use certificates of deposit as the collateral for a loan. CD loans provide can provide consumers with a fast and efficient funding option that carries a relatively low interest rate.
A number of banks and credit unions offer CD loans, but not all banks. The terms offered for these bank loans were vary dramatically between different financial institutions.
This type of loan is typically used by consumers who need funds but do not want to pay an early withdrawal penalty to liquidate their CD or because they have poor credit. Most banks that offer CD loans are not concerned about the borrowerâ€™s credit history for this type of loan since the bank holds collateral for the full value of the loan. These bank loans also have a low interest rate compared to an unsecured personal loan or credit card and the loan allows the savings to remain in place and accrue interest.
Certificate of deposit loans are usually established for short period of time. Most banks that offer CD loans require that the repayment period coincide with the maturity of the bank CD. A two year bank CD will have a maximum loan term of two years and so on. CD loans are also generally not greater than the amount of funds held in the CD. The depositor may be able take out a loan for up to 100 percent of the CD amount but not more.
The loan is secured by the investment in the bank CD account which leads to an interest rate to the borrower that is lower than similar term loans. The interest rate on the CD loan is usually established as a margin above the CD rate paid by the bank. For instance, a quick review of MB Financials CD loans indicates that the bank charges 2.25% over the CD rate paid by the bank. Most of the time the CD continues to earn interest and the loan payments are made separately.
If the borrower defaults on the loan, the bank can seize the money invested in the CD. With many banks, the CD depositor can renew the CD to extend and refinance the loan.
When consumer borrow money with or without security, the process can normally involve several steps including having the bank obtain a credit report. With a CD loan, the bank or credit union already has the collateral, the certificate of deposit, in their possession which makes the loan application and approval process more streamlined and simplified.
Not every bank or credit union offers the CD loan option even if they offer CDs as investments or other savings options. Check with the bank or other financial institution before moving forward.