Customers looking for a way to build a strong credit rating, or interested in borrowing some money to pay bills or even for extra spending, can consider the advantage of a secured loan borrowed against a certificate of deposit (also known as a CD) that they have established with their bank. Banks are often very willing to give CD secured loans, as the borrowers already have accounts with the bank and they have ready access to previous lines of credit. These secured loans are also advantageous to borrowers, as they will have lower interest due to the customer’s history and have a supply of money available to pay off interest in the CD itself. If you own a certificate of deposit with a bank, there is a good chance you can secure a loan with the account, but you should discuss the options with an accountant before taking action, as banks may not always give favorable terms given the state of the economy.
A certificate of deposit is simply an amount of money invested in a bank account over a long period of time — anywhere from six months to fifty years, which earns interest at a higher rate than in a standard savings account. CD interest may be as high as six percent, compared to standard interest of one to two percent, which routinely beats the interest on Treasury bonds and some short-term stocks. As such, CDs are a useful tool for lengthy investments or time away from financial decisions, and are popular for college accounts, inheritance, and mortgages. Borrowing against the amount in your CD provides greater stability to both parties than standard loans for home or car purchases.
CD secured loans, like any other type of loan, operate by giving banks (or credit agencies, if you have a CD account with one) the option of collateral on your loan, so that if repayment does not occur in timely fashion, the bank seizes the collateral as means of settling the debt. Automobiles are the most common method of collateral for loans, as nearly every working American owns a car and the average loan is sixteen thousand dollars, just under the cost of a new car. When a house is used as collateral, it is known as a foreclosure; foreclosed houses are the leading cause of homelessness in the United States.
For CD loans, the amount of money in the certificate of deposit is held as collateral against the debt. As such, the amount for a CD secured loan can be nearly unlimited money — as much as is held in a CD account. Banks tend to give loans with value up to ninety five percent of the value of the account, so that the remaining amount (five percent or more) will cover any costs of interest if the borrowed money is not paid back in time. In some cases, banks offset the interest on these loans because they will still be paying interest to the account; in other cases banks refuse to offset the money and suspend the interest to the account but still charge interest on the loan. Customers interested in this type of loan must be careful or the banks may sign a contract with withheld interest on their account while still charging on the loan.
The benefits of CD secured loans involve the simplicity of the set up. As the liquid assets are present for both parties to measure, there is no need for fees to appraise property. In addition, there may not be commission fees or taxes if the account is set up properly.
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