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Updated: Apr 06, 2023

Turning a CD into a Secured Loan: Pros and Cons to Consider

Find out how CD secured loans work and compare the pros and cons of this collateralized borrowing option.
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One of the worst feelings is knowing that you have money locked away in a certificate of deposit (CD), but not being able to access the funds without incurring an early withdrawal penalty.

Depending on your bank, CD holders have another option for accessing their money in the form of a CD secured loans.

These loans use the money in a CD as collateral, which lets them charge lower interest rates than a typical loan.

Even better:

Your credit doesn't really come into the equation.

If you have a CD and need some extra cash, find out if a CD secured loan is a wise choice for your particular financial needs.

What is a CD Secured Loan?

When you borrow money, you can get one of two types of loans. 

Unsecured loans, such as a personal loan or the money you borrow with a credit card don’t require any form of collateral.

This means that the lender trusts your word that you’ll repay the money you borrow. If you fail to make payments, the lender has fewer ways to compensate for its losses.

With a secured loan, you offer something of value as collateral for the loan.

For example, mortgages are secured by the value of the real estate you purchase. Your car serves as collateral for the auto loan you used to buy it. If you stop making payment, the lender can foreclose on your home or repossess your car.

That means:

There’s much less risk for the lender because they can get something of value from you if you default on the loan.

A CD secured loan is a loan where the money you deposit to a CD serves as collateral.

This lets you turn the balance of a CD into usable cash. It also reduces the lender’s risk, which means they can charge lower interest rates, saving you money compared to a conventional loan.

Depending on the lender, you may be able to borrow as much as the balance of your CD or a set ratio more than your CD’s balance.

How Do CD Secured Loans Work?

Typically, you can get a CD secured loan in one of two ways.

1. Apply for a secured personal loan

The first is by applying for a secured loan, even if you don’t already have funds in a CD.

If the lender approves your application, you’ll have to open a CD with a term equal to the term of your loan.

This lets you get a lending decision before you have to commit your money to the CD.

2. Turn an existing CD into collateral

If you already have money in a CD, you can ask the bank that holds your CD about secured loan options and offering your CD as collateral.

This is a good way to get cash if you already have a CD and lets you avoid the fees that come with early withdrawal.

The downside is that you have to work with the bank that holds your CD, which means you can’t shop around for a good deal.

Typically, you earn interest on the money you have in a CD, but loans typically charge interest to the people that borrow money.

When looking at your CD secured loan’s interest rate, remember that the interest your CD earns offsets some of the interest cost of the loan.

For example, if you have a $10,000 CD earning 1.5% APY and apply for a CD secured loan with a 3.5% APR, you effectively pay 2% interest for the loan.

Getting funds

Beyond that, CD secured loans work like any other secured loan.

You receive your loan as a lump sum and have to make monthly payments to pay down your balance. If you make your payments on time, it helps your credit while late or missed payments can incur fees and damage your credit.

CD secured loans may come with the same fees as other types of personal loans, including origination fees and early repayment fees.


Avoid early withdrawal penalty

One of the benefits of using a CD secured loan is that it lets you get access to some money without incurring a CD early withdrawal fee.

Depending on your bank, the size of your CD, and its original term, you could pay a fee equal to months or even years of interest by making an early withdrawal.

A loan costs money but could be cheaper in the long run if it lets you hold your CD to term. This is especially true for long-term CDs that you opened very recently.

Lower interest rates on secured loans

CD secured loans are also cheaper than other types of loans, like unsecured loans.

The security that your CD offers to the bank means they don’t have to charge a high rate of interest to cover their potential losses if you default.

In some cases, you might be able to get a CD secured loan with an interest rate lower than your CD’s interest rate.

In this scenario, you’re reducing the effective earning of your CD rather than paying money out of pocket in the form of interest.


Interest charges

A drawback of a CD secured loan is that it’s a loan. You have to pay interest when you borrow money.

That means, at a minimum, that you’re reducing your earnings from your CD.

If your CD doesn’t have a hefty early withdrawal penalty or you’re close to the CD’s maturity, it may make more sense to withdraw from the CD instead.

Less flexibility

Another con of CD secured loans is that you’re a captive audience for your bank if you’re trying to get a loan based on a CD you already have.

That means you can’t shop around for a deal and that the bank might not give you good terms for your loan.

When CD Secured Loans Make the Most Sense?

There are two scenarios where a CD secured loan makes sense.

You need cash without an early withdrawal

One is when you need access to cash and need to avoid early withdrawal penalties.

If you don’t have other sources of money, a CD secured loan lets you effectively get your money out of a CD without paying the early withdrawal fee, which can be hefty.

Build good credit

Another is when you need to build credit. Secured loans are much easier to qualify for when you have poor credit because they limit the lender’s risk.

If you apply for a secured loan and promise to open a CD to serve as collateral, the lender is more likely to approve your application.

Once you get the loan, you can make regular payments to start boosting your score.


There are a few alternatives to CD secured loans that you should consider.


One is a home equity line of credit. If you own a home, you can tap into the equity you’ve built and use it as a flexible source of cash.

Typically, HELOCs are known for having low interest rates, often similar to mortgage rates, because your house serves as collateral for the line of credit.

Another perk is that you can withdraw money multiple times as you need to, which makes them more flexible than typical loans.

The drawback, of course, is that your home serves as collateral. If you fail you make payments, the lender could foreclose on your home.

Unsecured personal loan

Another alternative is an unsecured personal loan. These loans don’t require any security deposit and can let you borrow tens of thousands of dollars at a time.

Another benefit is that there is a huge variety of banks and online lenders that offer them, giving you a chance to shop around.

However, unsecured personal loans tend to cost more than secured loans, charging higher rates of interest to compensate for the lender’s increased risk.


CD secured loans can help you get access to cash when you have money locked into a CD.

They typically have low interest rates and are easier to qualify for than other types of loans.

These features also make them a good option for people looking to build credit. If you want to get a loan to start building a history of timely payments, consider a CD secured loan.