Most banks will lend you between 80 and 95 percent of your certificate of deposit’s value when you borrow against a CD, and some lenders go all the way to 100 percent.1Bankrate. What Is a CD Loan and How Can I Apply for One? The deposit stays put and keeps earning its original rate while the pledged portion is frozen as collateral. Because the bank already holds your money, the interest rate is low and approval is straightforward.
The Percentage You Can Borrow
The ceiling depends on each bank’s loan-to-value policy for CD-backed lending. On a $10,000 CD at a bank that caps borrowing at 90 percent, the maximum loan is $9,000. A few institutions allow the full balance.
Several things can pull that ceiling down. A CD with only a few months left before maturity may qualify for a smaller percentage, since the bank has less time to recover funds if the loan runs into trouble. Most lenders also require that the CD already sit at their institution. You generally cannot open a CD at one bank and pledge it at another.
Once the loan funds, the pledged portion of the CD is frozen. You cannot withdraw those dollars or close the CD until the loan is paid off.1Bankrate. What Is a CD Loan and How Can I Apply for One? The principal keeps earning its original rate for the life of the loan.
What the Loan Costs
Lenders price these loans by adding a fixed spread on top of what your CD already earns. The spread is typically 2 to 3 percentage points above the CD yield.2Experian. What Is a CD Loan? A CD paying 4.5 percent, for instance, produces a loan rate of roughly 6.5 to 7.5 percent. The spread can run higher depending on the lender or your credit profile, but the final rate still sits well below unsecured personal loans (often 10 to 15 percent) and credit cards (commonly 20 percent or more).
The number that actually matters is the net cost: the loan rate minus the yield the CD keeps earning. On a $5,000 loan at 7 percent against a CD earning 4.5 percent, the effective cost is about 2.5 percent per year. Confirm whether the spread is fixed for the life of the loan or adjustable before you sign.
Borrow Against It or Cash It Out
Breaking the CD early is simpler but usually more expensive. Early withdrawal penalties on a one-year CD typically run about three months of interest, and penalties on a five-year CD can exceed eight months of interest. You also lose the earning power of that deposit permanently.
A CD-secured loan avoids the penalty. The deposit stays intact, keeps earning, and you repay over time. The trade-off is loan interest during the repayment period. For short-term needs, bridging a gap before a paycheck, bonus, or tax refund, the loan’s net interest is often less than the withdrawal penalty. For longer stretches, run both numbers: total loan interest versus the penalty plus the CD earnings you would forfeit.
Fees and Required Disclosures
These loans are generally low-cost, but some lenders charge an origination fee, either a flat dollar amount or a percentage of the loan. Percentage-based origination fees are typically deducted from the proceeds at funding, so you receive less than the approved amount. Ask about origination fees, application fees, and any annual maintenance charges before you commit.
Federal law requires the lender to give you specific cost information 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 spells out how each figure is calculated and presented.4eCFR. 12 CFR 1026.18 – Content of Disclosures Compare offers using the APR rather than the stated interest rate, because the APR captures fees rolled into the loan.
Repayment and Default
The loan term often aligns with the CD’s maturity date, so both obligations end 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.
Miss payments and 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 a balance is owed, the bank takes what it is owed and returns any remainder. A default may also be reported to the credit bureaus.
Do Not Pledge a CD Held in an IRA
If your CD sits inside an Individual Retirement Account, it cannot be used as loan 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 gets added to your gross income for the year, and if you are under 59½, you may also owe a 10 percent early distribution penalty on top of regular income tax.
The rule applies even though you never withdrew the money. The act of pledging is enough. 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