Borrowing Against Certificates Of Deposit (CDs) Or Other Term Bank Accounts
Most Certificates of Deposits (CDs) and some other bank accounts charge substantial penalties if you with withdraw money or close them altogether during a certain period of time.
It may be better to borrow against these assets if the amount of interest you will pay on the loan is less than the money you would lose by paying penalties and foregoing interest.
Loans against CDs and other term bank accounts are available very quickly from commercial lenders - usually with interest but without fees. Check with your bank or credit union, especially with the bank that issued the certificate of deposit or holds the account.
Compare alternatives before you make a decision. If you have difficulty with the math, your local banker can run the numbers for you to show you what would happen in different situations.
Following is ann example of the cost of borrowing instead of breaking a CD using simplified numbers to give you an idea of how you can save money by borrowing against a CD or other term account instead of terminating it early:
- Sally has a CD for $5,000 which will earn 5% interest ($250) if she holds it for twelve months.
- However, if Sally takes the money from the account before the end of the twelve months, her interest will be reduced to 3% ($150).
- At the end of the 6th month, Sally needs $3,000.
- The very bank in which she has the CD is willing to lend her the money with repayment secured by the CD at a rate of 4%, with no closing or other costs. Interest she would pay for the six months until she repays the loans with the proceeds from the CD will cost her $60.
An alternative to breaking a CD is to spread your money among CDs with maturities from three months to one year. When the CD matures, you can get to the money or roll it over. Keep im mind that the longer the maturity for a CD, the higher the interest rate.
If you send a request concerning a CD by mail, it is advisable to send it in such a manner that you receive proof of receipt - such as US Postal Service, Return Receipt Requested.