Benefits of a Certificate-Secured Loan

A certificate-secured loan lets you use the funds in a certificate of deposit (CD) without breaking it by putting up the CD as collateral for a loan of no more than the principal amount.

There are several clear benefits of using a certificate-secured loan over an unsecured loan. Banks charge lower interest rates on a certificate-secured loan, typically only 2-3% over the interest rate paid by the CD. Since you continue collecting interest on the CD, your effective loan rate is 2-3%. Borrowing less than the total principal of the CD, or borrowing it for less than the full the term (for instance, borrowing for 3 years on a 5-year CD), you may even pay less interest on the certificate-secured loan than the total paid to you by your CD.

Certificate-secured loans let you access money in an emergency without eroding your principal. A CD requires you to lock in your money for months or years. Breaking a CD will cost you 10% of the principal in addition to the loss of unearned interest. For a small premium (the difference between the interest paid by the CD and the interest charged by the certificate-secured loan), you can preserve your principal and interest.

One potential drawback: The term of the certificate-secured loan is limited to the length of the CD. Borrowers should consider whether they can pay back the loan in its entirety if, say, there is less than a year left before the CD matures.

 


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