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What is a Cd Loan? – MyFinanceInsurance

by Shagun Saini
what is a cd loan

What is a cd loan? And why is it considered as an important investment option as well as a good option to consider for a short-term emergency or in case of quick need of cash? Thus, cd loans to rebuild credit are a great option to consider.

What is a Cd Loan?

A type of personal loan that you get by putting up security, and where you put up a certificate of deposit as security is what we called a CD ( certificate of deposit ) loan.

So, it is a type of money market instrument which is offered by banks and credit unions in order to provide an interest rate premium in exchange for a lump sum deposit kept as a security. So, here in case of default, the bank can take the money in your CD.

Although opting for a CD is a good option to consider for a short-term emergency or in case of quick need of cash. And a higher amount of interest rates could also be earned than regular savings accounts from Certificates of deposit (CD).

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How Does a CD Loan Work?

Opening a CD account is much like opening a savings account that offers fixed payments of principal and CD loan interest rates. So, by completing the accounting process you will receive the following:

  1. The CD loan interest rate
  2. The CD loan term
  3. The CD loan principal
  4. The institution

The CD Loan Interest Rate

The CD loan interest rates are much lower as compared to the ones charged by credit cards or some riskier or unsecured loans. As the bank does not allow you to borrow the full CD amount and different banks offer different interest rates on CD loans.

Where in the current market you can get around 5.7 % as the interest rate for a personal loan but in the case of unsecured loans the interest rate may rise to 30 % or more.

The CD Loan Term

The CD loan term tells us the period for which your collateral money is locked in with the bank. This term may be of 6 month CD, 1 year CD, 18 month CD, etc. It ends with the maturity of the period after which you can take or withdraw your funds kept as collateral security.

The CD Loan Principal

The CD loan principal is the amount that you agree to pay to the bank as security or collateral, and the one which is locked in up till the maturity of your CD loan.

The Institution

The institution here refers to the bank or credit union, where you have opened up your CD account and that bank or credit union as The institution determines the terms & conditions associated with your CD loan such as its early withdrawal penalties (EWPs), etc.

Things to be Consider Before Investing in CD Loans

You should consider the following things about Cd loan before investing your money in CD loans, which are as follows:

  • Current Rate of Interest or cd loan rates
  • Expected Rate of Returns
  • Time of the CD
  • Limited Liquidity of cd loan
  • Fluctuating interest rates

CD Loan Example

  • Example 1: When Interest Compounded annually

You are given with the following information as:

An Initial Deposit of $ 40,000, with an Interest Rate of 6.5 % Compounded annually having a lock in or Deposit Length of 5 years. You need to calculate the matured amount with its interest rate?

Solution

YearStart principalStart balanceInterestTaxEnd balanceEnd principal
1. $ 40,000.00$ 40,000.00$ 2,600.00$ 0.00$ 42,600.00$ 40,000.00
2.$ 40,000.00$ 42,600.00$ 2,769.02$ 0.00$ 45,369.00$ 40,000.00
3.$ 40,000.00$ 45,369.00$ 2,948.97$ 0.00$ 48,317.98$ 40,000.00
4.$ 40,000.00$ 48,317.98$ 3,140.67$ 0.00$ 51,458.65$ 40,000.00
5.$ 40,000.00$ 51,458.65$ 3,344.81$ 0.00$ 54,803.47$ 40,000.00

So, here the Maturity balance is $ 54,803.47, in which the Total Principal amount is $ 40,000.00 and Total Interest is $ 14,803.47 when the interest was compounded annually.

  • Example 2: When Interest Compounded semi-annually

You are given with the following information as:

An Initial Deposit of $ 10,000 with an Interest Rate of 4 % Compounded semi annually having a lock in or Deposit Length of 5 years. You need to calculate the matured amount with its interest rate?

Solution

YearStart principalStart balanceInterestTaxEnd balanceEnd principal
1. $ 10,000.00$ 10,000.00$ 404.01$ 0.00$ 10,404.00$ 10,000.00
2.$ 10,000.00$ 10,404.00$ 420.32$ 0.00$ 10,824.32$ 10,000.00
3.$ 10,000.00$ 10,824.32$ 437.29$ 0.00$ 11,261.62$ 10,000.00
4.$ 10,000.00$ 11,261.62$ 454.97$ 0.00$ 11,716.59$ 10,000.00
5.$ 10,000.00$ 11,716.59$ 473.35$ 0.00$ 12,189.94$ 10,000.00

Note: Here, the interest rate of 4 % compounded semi annually equals to an annual interest rate of 4.040 %

So, here the Maturity balance is $ 12,189.94, in which the Total Principal amount is $ 10,000.00 and Total Interest is $ 14,803.47 when the interest was compounded semi annually.

  • Example 3: When Interest Compounded monthly

You are given with the following information as:

An Initial Deposit of $ 20,000 with an Interest Rate of 4 % Compounded monthly having a lock in or Deposit Length of 6 months. You need to calculate the matured amount with its interest rate?

Solution

YearStart principalStart balanceInterestTaxEnd balanceEnd principal
1. $ 20,000.00$ 20,000.00$ 66.67$ 0.00$ 20,066.67$ 20,000.00
2.$ 20,000.00$ 20,066.67$ 66.89$ 0.00$ 20,133.56$ 20,000.00
3.$ 20,000.00$ 20,133.56$ 67.11$ 0.00$ 20,200.67$ 20,000.00
4.$ 20,000.00$ 20,200.67$ 67.34$ 0.00$ 20,268.00$ 20,000.00
5.$ 20,000.00$ 20,268.00$ 67.56$ 0.00$ 20,335.56$ 20,000.00
6.$ 20,000.00$ 20,335.56$ 67.79$ 0.00$ 20,403.35$ 20,000.00

So, here the maturity balance is $ 20,403.35, in which the Total Principal amount is $ 20,000.00 and Total Interest is $ 403.35 when the interest was compounded monthly.

CD Loan Calculator

You can also use the cd loan calculator to calculate the CD loan interest rates with duration offered to know how much your investment will be worth and the amount of your future investments.

Cd Loans to Rebuild Credit

Yes, Cd loans are also a great option to consider as they help you rebuild your credit score and are much easier to get than other loans. Thus, acting as a great medium for people with a credit history or a bad credit score.

But, you should be careful here as you miss your credit cd loan payment then also it will hurt your credit score, and it will get affected. Thus, you can use cd loan to improve credit and your credit score.

Pros of CD Loans

When there are no other liquid assets available in the market then CD loans are the quickest way to make funds available in the market. Thus, they also hold some advantages such as:

  • They make the funds easily available.
  • There is an easy cd loan approval
  • You can get lower interest rates
  • You can build up your credits
  • Keeps your savings in place
  • CDs continue to accumulate interest

Frequently Asked Questions

  • Are CD secured loans a good idea?

Yes, CD loans are considered as a good option for personal loan with lower rate of interest on a personal loan. Where, the certificate of deposit is kept as a collateral security of the loan.

  • Can you borrow money from a CD?

No, you can not borrow money from a CD. Although you can borrow money against your CD ( collateral deposit). Where your bank or financial institution as per their norms can lend up to 100 percent of the CD amount kept as security.

So, as long as you have kept the collateral deposit with bank you can ask for loan with the institution for any amount you desire and for any duration.

  • Does a CD loan help your credit?

Yes, CD loan can help you to build up your credit. as they help you rebuild your credit score and are much easier to get than other loans. Thus, acting as a great medium for people with a credit history or a bad credit score. But, you should be careful here as you miss your credit cd loan payment then also it will hurt your credit score, and it will get affected.

  • What is a CD investment?

A CD investment or A certificate of deposit (CD) is an investment option where you can boost your earnings with interest earned more than what savings accounts offers. CD investment is low risk option to consider where you are insured up to $ 250,000 by FDIC.

Conclusion

CD loans are considered a good option for certain customers, although there exist certain conditions and fees associated which need to be considered before choose the CD loans as they are an effective way to gain access to cash quickly.

So, the CD loan is a type of money market instrument which is offered by banks and credit unions in order to provide an interest rate premium in exchange for a lump sum deposit kept as a security. Thus, by now it is clear What is CD loan? And CD loan as a money market instrument for quick cash availability.

In this article, we have successfully explained What is a cd loan.

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What is a Cd Loan?

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