CD Loan Pros & Cons: What You Need to Know

You are doing all the right things: saving steadily, building a rainy-day fund, and watching your money grow with high CD interest rates. But life happens! Maybe your car needs repairs, a surprise expense demands attention, or you receive an opportunity that you don’t want to miss. In these situations, you need cash. But what if your money is locked away in a certificate of deposit?  Luckily, CD loans provide a great option for short-term borrowing needs. However, like any financial solution, they also have their drawbacks. Keep reading to compare the advantages and disadvantages of CD loans.

CD Loan Definition

A CD loan is a type of secured loan that uses the balance of your certificate of deposit (CD) as collateral. In other words, you borrow money from a bank using your own CD as security. Because the loan is backed by funds you already have in your deposit, qualifying is easier compared to other types of loans.

CD loan amounts are based on your existing CD balance. You can borrow the full amount, or you can borrow less if you want. After you receive the loan, you may use it for any purpose—from covering unexpected expenses and consolidating debt to buying a new appliance for your home. Over time, you repay the amount you borrowed (plus interest) in regular installments.

CD loans are also called “CD terms loans” and “CD-secured loans.” No matter what you call them, they have one main purpose: to help you access money without breaking your certificate of deposit early—and without triggering the penalties that come with it. This makes them a practical option for borrowers who need short-term funds and have savings to leverage.

Pros of CD Loans

At first glance, borrowing against your own money might seem unusual, but CD term loans offer some real benefits for many people:

1. Pro: Easy Approval

Since the loan is secured by your certificate of deposit, approval is typically quick and straightforward. Even if your credit history isn’t perfect—or if you have limited credit experience—banks are more likely to approve the CD loan since the risk is minimal for them.

2. Pro: Better Interest Rates

CD term loan interest rates are lower than personal loan or credit card rates. Because the loan is backed by collateral, lenders can offer more favorable terms, which saves you money on interest.

For example, while a personal loan might have an interest rate around 10-15% (and a credit card could have a rate at 20% or higher), a CD-secured loan falls in the 4-8% range. That difference can add up to hundreds of dollars in savings over the life of your loan.

3. Pro: Ongoing CD Growth

One of the best parts? Even though you are borrowing funds, your CD account continues to earn interest while you repay your loan. This lets you keep your CD intact rather than missing out on future earnings. Therefore, your savings can keep growing in the background, helping you reach your financial goals while covering immediate expenses.

4. Pro: Build or Improve Your Credit

If you make your loan payments on time, a CD loan can help you build (or rebuild) your credit score. Each on-time payment is reported to the credit bureaus, which shows that you are a responsible borrower.  As your credit improves, you will start to see the benefits—like better rates on more products, access to premium credit cards, and higher borrowing limits.

5. Pro: Flexible Spending Options

There are NO RESTRICTIONS on how you spend the loan funds. Whether it’s covering a medical bill, consolidating debt, or taking care of a short-term expense, a CD term loan gives you the freedom to use the money however you need. Unlike some loans that can only be used for specific purposes (like auto loans or mortgages), you are in control of how the money is spent!

Cons of CD Loans

Like any financial solution, CD-secured loans have their downsides. Here are a few things to consider before you commit:

1. Con: Collateral Risk

If you default on your loan payments, your original certificate of deposit is on the line. Since your CD secures the loan, the bank can take those funds to cover your remaining loan balance. This could mean losing part (or all) of your CD savings, depending on the remaining balance you owe.

2. Con: Limited CD Loan Amount

Your borrowing power depends on the amount in your CD. If you have a $5,000 certificate of deposit, then $5,000 is the most you can borrow. Therefore, your ability to finance large projects hinges on how much you already have invested. For larger expenses that exceed your CD balance, you will need to explore other borrowing options.

3. Con: Loan vs. Savings Net Cost

Even though your CD earns interest, you still need to pay interest on your loan. This is where your understanding of APY vs. APR (annual percentage yield vs. annual percentage rate) is especially important. In most cases, the loan interest rate (APR) will be higher than your CD earnings, meaning you will pay a small “net cost” for the convenience of accessing your money early.

4. Con: Not Widely Available

CD term loans aren’t offered by every financial institution, which can limit your choices. In most cases, you will need to borrow from the same bank where your existing CD is held. Therefore, you can’t shop around for the best loan terms—you are stuck with the rates and conditions your bank offers.

5. Con: Short-Term Loan Structure

CD loans are not ideal for long-term borrowing goals. Because the loan’s repayment period can’t exceed the maturity date of your original CD, you have a limited time to pay it back (typically a few months to a few years). This short window makes it difficult to cover big expenses, meaning you might need to find a different lending option for major projects.

Is a CD Term Loan Right for You?

CD term loans might not be the best choice for all your borrowing needs, but there are certain situations when they make sense:

• You need cash but don’t want to break your CD: Early withdrawal penalties can cost you 3-12 months of interest. Borrowing against your CD lets you avoid that penalty while your CD keeps earning interest.
• You are looking for a short-term bridge loan: If a paycheck, tax refund, or work bonus is on the way, a CD loan can cover your expenses in the meantime.
• You want to borrow a specific amount: If you have a $5,000 certificate of deposit and need to borrow $5,000, a CD loan provides exactly what you need.
• You have limited credit history: CD-secured loans are easy to qualify for and help you build credit. Making on-time payments shows lenders you are responsible for, which will boost your credit score over time.

Academy Bank’s Certificates of Deposit and CD Term Loans

At Academy Bank, we understand that flexibility matters. Our CD term loans are designed to support your borrowing needs, without disrupting your savings goals.

Here’s why our CD loans stand out:

• Low, fixed interest rates that help you plan out payments
• Fast, easy approval with minimal paperwork
• Build or rebuild credit with on-time payments
• Choose a loan term equal to or less than your CD’s maturity date
• Keep earning interest on your CD while you repay the loan

With Academy Bank, you don’t have to choose between financial flexibility and financial growth—YOU CAN HAVE BOTH! Visit your nearest branch or explore our online resources to learn how our CD-secured loan¹ and certificate of deposit² options can work for you.