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PSA - if you have a loan secured by a CD at a bank, pay it off immediately
Posted on 6/14/23 at 6:41 am
Posted on 6/14/23 at 6:41 am
CD secured loans are very popular despite being one of the worst tools in finance. They are fools gold. People are happy to give the bank incredibly liquid fully covered collateral, and the bank charges them 2% or higher loan interest than what they’re paying on the CD. Do not think of them as a 2% loan - they’re a negative 2% rate on your own actual money.
There is virtually no scenario where a CD secured loan makes sense. The only plausible reason is if the penalty on the CD is higher than the total loan interest you’re going to pay. This came up in a recent “how to pay for a vehicle” thread, and it’s one of those financial topics that irks the hell out of me.
There is virtually no scenario where a CD secured loan makes sense. The only plausible reason is if the penalty on the CD is higher than the total loan interest you’re going to pay. This came up in a recent “how to pay for a vehicle” thread, and it’s one of those financial topics that irks the hell out of me.
4
Posted on 6/14/23 at 7:08 am to slackster
Is this like borrowing against the cash value of life insurance and claiming it is a valuable feature of the policy?
Posted on 6/14/23 at 7:18 am to meansonny
I had a client that refused to pay off a 2.5% loan that was secured by their savings account “because then they won’t have any money in their savings account.” It didn’t matter how many ways I tried to convince them that they don’t have any money in their savings account right now anyway- it’s totally restricted with a hold for the value of the damn loan.
This post was edited on 6/14/23 at 8:48 pm
Posted on 6/14/23 at 9:06 am to slackster
Why would anyone take out a loan on money they've 'loaned' to the bank in the form of a CD? That probably doesn't even make sense to a middle schooler.
Posted on 6/14/23 at 4:48 pm to skewbs
quote:
Why would anyone take out a loan on money they've 'loaned' to the bank in the form of a CD? That probably doesn't even make sense to a middle schooler.
Happens all the time, unfortunately.
Posted on 6/14/23 at 5:20 pm to slackster
quote:Thanks for the thread. I would add: CDs are just stupid in general.
PSA - if you have a loan secured by a CD at a bank, pay it off immediately
Posted on 6/14/23 at 8:50 pm to Big Scrub TX
quote:
Thanks for the thread. I would add: CDs are just stupid in general.
Meh, I’d rather a 2 YR CD over a 2 year treasury. Hell, I’d rather a 5 yr CD give the right spreads on corporate bonds, but people have a tendency to go overboard on CDs when rates are higher without considering the risks - all they’re concerned with is principal risk.
Posted on 6/16/23 at 9:11 am to skewbs
Some people can’t save. Is what it is. Sometimes they get one time money and rather than borrow against something else they borrow against an asset they don’t want to touch. When the loan is paid off they still have the money they started with. It’s not hard really. People with no credit or bad credit as well can use that to start correcting it as it is a hard asset to use for collateral
Posted on 6/16/23 at 6:03 pm to slackster
quote:
CD secured loans are very popular despite being one of the worst tools in finance. They are fools gold. People are happy to give the bank incredibly liquid fully covered collateral, and the bank charges them 2% or higher loan interest than what they’re paying on the CD. Do not think of them as a 2% loan - they’re a negative 2% rate on your own actual money.
Is that 2% better than the rate you would get on an unsecured loan?
Pretty sure that's the point.
Posted on 6/16/23 at 8:02 pm to Bestbank Tiger
Yea but you still have the collateral in this scenario
Posted on 6/17/23 at 6:44 am to Bestbank Tiger
quote:
Is that 2% better than the rate you would get on an unsecured loan?
Pretty sure that's the point.
That’s the marketing, sure, but it’s not how it works in practice.
The moment you secure it by the CD you no longer have access to the CD, so it’s no different in practice than just using the CD balance to pay cash for the item. 2% is definitely higher than 0%.
Posted on 6/17/23 at 9:05 am to slackster
quote:
Some people can’t save. Is what it is. Sometimes they get one time money and rather than borrow against something else they borrow against an asset they don’t want to touch. When the loan is paid off they still have the money they started with. It’s not hard really. People with no credit or bad credit as well can use that to start correcting it as it is a hard asset to use for collateral
This exactly. About the only time it truly makes sense.
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