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What Is a CD Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You’ve probably heard of certificates of deposit (CD) — but have you ever heard of a CD loan? While CDs are traditionally a savings tool, they can also be helpful when borrowing money. Some banks and credit unions allow you to borrow money against a CD that you already own, in the form of a secured loan.

“CD loans aren’t very common,” says Thomas Rindahl, financial advisor with TruWest Wealth Management Services in Phoenix. “In fact, when I talk to people, most don’t realize they are available. You’ll have to check with different financial institutions to see if they offer the service, but they can be useful for some people.”

CD loan: How does it work?

A CD loan is a loan that is secured with a certificate of deposit you already own. This type of loan allows you to borrow against the funds you have saved in a CD without having to pay early withdrawal penalties. You can use this type of loan for a variety of uses, such as debt consolidation, home improvement expenses, or medical bills.

The amount you can borrow will depend on the financial institution, but it can generally range from $500 up to $250,000. The amount you can borrow will vary. Some banks will allow you to borrow the full CD amount, while other banks cap CD loans at a percentage of the total amount in the CD. Some banks will only allow you to borrow against CDs that you have with their institution, and will not accept CDs issued by other banks as security.

These loans often have lower interest rates than those you’ll be charged with credit cards or unsecured loans. For example, at Wells Fargo the annual percentage rate (APR) for a CD-secured loan is fixed and ranges from 5.50% to 13.79%, while the APR for an unsecured personal loan ranges from 5.49% to 22.99%. CD-secured loans can also charge an origination fee.

Interest rates on CD loans tend to be lower than unsecured loans because you’re using your CD as collateral, meaning the bank can take the money in your CD if you were to default on the loan. In fact, even if you have a high debt-to-income ratio or a low credit score, you may still be approved for a CD loan.

“It’s relatively easy to qualify for a CD loan because it’s 100% secure as far as [the] financial institution is concerned,” says Rindahl. “This is a good type of loan if someone is looking to establish or reestablish credit. If the borrower makes the payment on time, they’ll have good credit reported to the credit agencies.”

Approval for the loan is often quick, with some financial institutions providing approval within hours and funding the same or next business day.

Pros and cons of CD loans

ProsCons
  • Lower interest rates than some other personal loans

  • Easier to qualify than an unsecured loan since you’re using your CD as collateral

  • Ability to build or rebuild credit history

  • Funds are made available to you relatively quickly

  • Installment payments can be budget friendly

  • CD-secured loans often have an origination fee

  • May not be the best option for someone with established credit

  • You put your savings at risk if you fail to pay back the CD loan

Should I get a CD loan?

If you currently have a CD and need quick cash, this type of loan can be a good option, since the application process is usually easy and the funds are often dispersed quickly. By taking out a CD loan, you can avoid having to pay a penalty for cashing in your CD before its maturity date.

These loans can also be a good choice for people who want to build their credit history or who need to rebuild their credit score after having trouble in the past. Qualifying for a CD loan is easier than qualifying for many other types of loans.

If your goal for the loan is to repair your credit history, make sure the financial institution submits your payment history to at least one of the three major credit reporting bureaus: Experian, Equifax and TransUnion. You will want to make your payments on time; if you don’t, missed payments could hurt your credit score.

Before you take out a CD loan, it can be helpful to explore whether cashing out your CD is the cheaper option. Since these loans include origination fees and interest, it might be more cost effective to cash in your CD, even if it incurs an early withdrawal penalty. The decision can depend on your CD interest rate.

For example, a 12-month $5,000 CD loan with a 5.5% APR and an origination fee of $75 would cost $225. Subtract the amount of interest you would earn from the CD during that year. If your CD has a 2.5% annual percentage yield (APY) and compounds monthly, you would realize earnings of $125 during that period of time, which means the net cost of the loan would be $100.

If you cashed out your CD instead of taking a secured loan against it, you would pay an early withdrawal penalty, which is often an amount of the interest earned. The average penalty for a 12-month CD is 120 days, or four months, of interest. If your CD pays 2.5% interest each year, you would forfeit $41.67. In this case, cashing out your CD may be the better choice.

Alternatives to CD loans

While a CD loan may be a good choice for some, there are other types of secured loans and lines of credit that help you with your money needs as well as help you build your credit.

  • Home equity line of credit (HELOC): If you are a homeowner, a HELOC may be a better vehicle. The line of credit uses your home equity as collateral. You can use as much or as little as you like, depending on your needs, which may be more convenient. Still, this could be risky, as you’d lose your home if you defaulted.
  • Secured credit card: If your goal is to build credit, a popular option is a secured credit card, offered by many financial institutions. You submit a deposit that becomes your credit limit and acts as collateral for the loan. “If you’re not using the line of credit, you have nothing to pay and it won’t infringe on your monthly cash flow,” adds Rindahl.
  • Savings-backed loans: You can also get a loan or line of credit that is backed by your savings account. If you don’t have a CD but do have a savings account, this may be an easier option. During the time of your loan, however, you will not be able to use the funds in your savings account.

The bottom line

While CD loans are a great option for certain customers, it’s important to understand the terms and fees that are attached. Also, be sure to weigh all of the options to find the best loan vehicle for your needs. Your banker can help by doing a quick comparison of all of your alternatives so you find the loan product that’s best for you.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stephanie Vozza
Stephanie Vozza |

Stephanie Vozza is a writer at MagnifyMoney. You can email Stephanie here

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Banking

How to Start Saving Money

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Faced with an unexpected expense, like a car repair or leaky roof, many Americans might not have enough money in the bank to cover the bill. Just over half of U.S. households currently have a savings account, and 29% of households have less than $1,000 saved, according to a MagnifyMoney survey.

Whether putting money away for a rainy day or retirement, good savings habits can prepare you for emergencies and life changes. There are countless ways to build up your savings, from finding ways to cut back on spending to looking for areas where you might be overpaying. The time and discipline you invest implementing them will pay off — quite literally.

How can I start saving money?

If you’re just starting out on the path of building your savings, small changes can add up over time. A review of your budget should uncover items that can deliver larger, immediate gains. Here are more than two dozen money-saving strategies you can adopt for the short-term and the long-term.

Tips for saving money today

1. Set an intention
According to Sergio G. Garcia, associate planner for Quest Capital Management in Dallas, Texas, “saving money is tied to behavior and psychology, so it is important to find a personal focus to drive the savings behavior that works best for you.” Write down the reasons you want to save money, such as buying a house or retiring early, and put it in a place you’ll see every day.

2. Save your spare change
Collect your spare change at the end of the day and put it into a jar — you’ll be surprised at how quickly it can add up. If you use a debit card, some banks, like Bank of America, offer round-up savings plans, automatically moving the change into your savings account. For example, if you spend $19.50, the program will round-up your purchase to $20 and move $0.50 into your savings account.

3. Get a micro-saving app
Similar to saving spare change, you can also link your bank account to a money-saving app that does the savings for you. For example, Acorns automatically rounds up your purchase and moves the change into an investment account.

4. Cut the excess
To save money, you need to know where you’re currently spending it, suggested Matthew Gaffey, senior wealth manager for Corbett Road Investment Management in McLean, Va.: “List and monitor all of your expenses to get a full picture of how much you’re spending and where.” Money management habits will typically shed some light on a few areas that you could reduce or cut, such as unused magazine subscriptions or gym memberships.

5. Adopt a waiting period
The ease of online shopping can be brutal to your budget. Instead of falling for the impulse to make a purchase on the spot, implement a wait policy, such as 24 or 48 hours. You might realize you can live without that item you’re craving.

6. Don’t fall for a “great deal”
It’s hard to resist the lure of a good bargain. But saving 50%, 75% or even 90% isn’t a good deal if you don’t really need it. Instead of focusing on the discount, consider the amount you’re spending and how much you’ll really use the item.

7. Use a cash-back credit card
Some credit cards offer as much as 5% cash back in certain categories, which can add up. For example, the Chase Freedom® offers bonus categories each quarter – Earn 5% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate. Enjoy new 5% categories every 3 months. Unlimited 1% cash back on all other purchases. If you spend the full $1,500 each quarter in the bonus categories you could earn $300 cash back a year. If you were going to make these purchases anyway, this is a good way to save money.

The information related to Chase Freedom® has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication. Terms apply.

8. Find rebates
Before making an online purchase, check cash-back sites like Mr. Rebates or Ibotta and see if the store offers a rebate if you click through the site. You could earn a set cash-back amount or a percentage on a purchase.

Ways to start saving money every month

1. Automate monthly savings
Sign up for automatic savings withdrawals. “Direct deposit from a paycheck is great because then it happens automatically and you don’t even have to think about it,” said Amy Shepard, financial planning analyst at Sensible Money in Phoenix. In addition, she advised, “set reminders to increase your savings periodically, such as every six months or every time you get a raise.”

2. Create specific savings goals
Save for big things, like a vacation or kitchen renovation, by using a bank that allows you to set up separate savings accounts for different goals, said Bethany Griffith, senior financial advisor and partner at Abacus Planning Group in Columbia, S.C. “It can be a great way to jump start savings,” Griffith said. “The visual check-in each time you look at your accounts is a powerful driver for changing behavior.”

3. Do a 52-week money challenge
With the 52-week money challenge, you save more every week, and see clearly how savings can add up over the course of a year. Create a weekly savings challenge by saving $1 on the first week, $2 on the second week and continue until you’re saving $52 on the final week of the challenge. In a year you’ll have saved $1,378, not including interest.

4. Create a weekly meal plan
The average American household spends more than $3,400 a year on meals away from home. You’ll be less likely to eat out or order in if you’ve planned your meals for the week. Having a meal plan also helps you create a grocery list to avoid impulse purchases or food that goes uneaten.

5. Review your monthly bills
It’s irritating when your cable or cell phone bill goes up, but that extra $5 or $10 a month can add up to $60 or $120 over the course of a year. Pay attention to your monthly bills. If you see an increase, call and ask why. If you’ve been a customer for a long time, companies will often lower the rate instead of risk losing you.

6. Pay down debt
Americans pay $113 billion in credit card interest each year. If you’re among those that carry a balance, you can get an immediate return on your money by paying it down and eliminating it.

7. Adjust the thermostat
Save as much as 10% a year on heating and cooling by adjusting your thermostat seven to 10 degrees from its normal setting for eight hours a day. This can be while you’re at work or while you’re sleeping — or both, for even more savings. A programmable thermostat can do the work for you, easily paying for itself.

8. Use a price-drop refund app
Several retailers will give you money back if an item you bought goes on sale, but tracking that can be a chore. Use an app like Earny to do the tracking for you automatically. The app also takes care of the claim — Earny claims it saves the average user $75 each year.

Start saving money over the long term

1. Annualize your spending
A latte or vending machine habit might seem harmless, but when you multiply that daily expenditure by five days a week and 50 weeks a year (assuming you take a two-week vacation), it can add up to a substantial sum — one that might not seem worth it when you annualize your spending. Try this with your regular discretionary spending and see what you could do without.

2. Review your insurance
Make a habit to review your property and auto insurance each year. Jeffrey N. Tomaneng, director of financial planning for Sapers & Wallack in Newton, Mass., recently had an agent audit his policies and made changes to save $2,100 a year in premiums — “within a few days we were off to some much needed household savings,” he said.

3. Sell your stuff
The average American has 42 items in their home they no longer use worth an estimated $723. Sell them! Hold an annual garage sale, or list your items on eBay, Mercari or Facebook Marketplace. Someone else can use and enjoy them and you can pocket the money.

4. Shop around for higher interest rates
Your bank savings account may be conveniently attached to your checking, but if the interest rate is negligible you could be leaving money on the table. Look for higher interest-rate savings accounts that can help you build your balance.

5. Review your withholdings
Each year, review your benefits and withholdings and ensure you’re taking advantage of the benefits your company offers, such as flexible spending accounts or matching retirement. If you get a refund each year after tax season, consider adjusting your exemption amounts and stop giving the government an interest-free loan on your own money.

6. Look for discounts
If you’re a member of a professional or alumni association, you may get discounts on business services, insurance or travel. Make a point to review your benefits each year, and use them to find the best deals.

7. Review your credit card benefits
Before you buy that extended warranty or insurance on your rental car, check and see if the credit card you’re using offers it for free as a benefit of being a cardholder. You can save hundreds of dollars by knowing what you’re already offered.

8. Check your credit report
Each year you should order a copy of your credit report to make sure it’s accurate; you may find a discrepancy that could hurt your chances of getting better interest rates on a loan. You’re entitled to a free report each year from each of the reporting agencies, which you can obtain from AnnualCreditReport.com.

Bottom line

Developing any new habit requires behavior changes — changes that can be uncomfortable at first. But getting into the habit of saving money is worth it. Building a nest egg can provide peace of mind. Once you start seeing your balances grow, the numbers will give you the motivation you need to keep going and keep saving.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stephanie Vozza
Stephanie Vozza |

Stephanie Vozza is a writer at MagnifyMoney. You can email Stephanie here

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Banking

What Is the Fed Beige Book and How Is It Used?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Recent financial news reports have noted that despite looming concerns about a trade war with China, the U.S. economy expanded modestly from June through August 2019. In fact, many businesses remain optimistic.

Ever wondered how this information is collected and measured? The Federal Reserve gathers commentary and measures the performance of the economy using a tool called the Fed Beige Book. Here’s what you need to know about the Beige Book, including how it affects the Fed’s decisions — and you.

What is the Fed Beige Book?

Created in 1983, the Fed Beige Book is a Federal Reserve System publication that is released eight times a year to provide detailed information about the current state of the economy. It is compiled by the 12 regional Federal Reserve Banks:

Each of these regional Federal Reserve banks gathers information on its district by conducting surveys with local businesses, community organizations, economists, market experts and other sources. The questions don’t ask for specific numbers; instead, they gather anecdotal information about trends, business activity, hiring and economic improvements or declines.

The Fed Beige Book includes the 12 district summaries as well as an overall national summary, characterizing conditions based on a variety of mostly qualitative data. The information gathered relays the pace of the economy at the local level, as well as the impact of national and global trends. The national summary covers three core topics: overall economic activity, employment and wages, and prices. Each district also includes topics or industry-specific reports related to their location.

The information compiled in the Fed Beige Book is divided into seven sections by economic sector:

  • Consumer spending and tourism
  • Nonfinancial services
  • Real estate and construction
  • Manufacturing and other business activities
  • Banking and finance
  • Agriculture and natural resources
  • Employment, wages and prices

The Fed Beige Book’s qualitative nature helps characterize regional economic dynamics, as well as noting trends that might not yet be quantified in the economic data. It’s used to complement statistical data collected on employment, unemployment, personal income, retail sales and real estate markets to provide a more complete picture.

How does the Federal Reserve use the Fed Beige Book?

The Fed Beige Book is given to the 12 members of the Federal Open Market Committee (FOMC) two weeks prior to their regular meetings. The group gathers eight times a year with three tasks contemplate: reviewing economic and financial conditions, determining appropriate monetary policy and assessing the risks to its long-term goals, price stability and sustainable economic growth.

The Beige Book provides information about the sectors and industries that are growing and those that are lagging — it’s especially important because many key regional economic statistics, like personal income and gross state product, only get released after experiencing a significant lag.

The FOMC uses the Beige Book to make decisions that include adjustments to the fed funds rate, the interest rate at which a bank lends funds held at the Federal Reserve to another bank overnight. Effective monetary policies by the FOMC can help stabilize prices and promote long-term economic growth and employment.

The Fed Beige Book is one of two reports the FOMC receives. The Fed Tealbook — officially called the “Report to the FOMC on Economic Conditions and Monetary Policy” — was created when two previously-distributed reports, the Bluebook and the Greenbook, were merged in 2010. The Tealbook is split into two parts: Part A contains analysis of current economic and financial conditions and projections (nationally and internationally), while Part B gives background and context on monetary policy alternatives.

How the Beige Book affects you

The Fed controls the three important monetary policies: Open market operations, the discount rate and bank reserve requirements. In particular, the FOMC is responsible for open market operations, which include adjusting the federal funds rate and the supply of cash reserves.

Changing the federal funds rate can impact short-term interest rates, foreign exchange rates, long-term interest rates and the amount of money and credit available. Those, in turn, can impact employment, output and the prices of goods and services.

A Fed Beige Book report that the economy is slowing down or stagnant could lead the FOMC to cut the federal funds rate, which can impact you in two ways. First, it can reduce the amount of interest you earn from savings and other deposit account types; banks will often lower rates within a few weeks of a funds rate cut. The second way provides a potential upside, as it can lower the interest you are charged on credit cards and for new mortgages. Most major credit card issuers lower their APRs after the Fed reduces rates, usually within one or two billing cycles. In addition, a lower federal funds rate can impact an adjustable-rate mortgage and HELOC, as they’re based on short-term rates.

The FOMC may also decide to increase the money supply in a slow economy to spur economic growth. The idea is that with more money available, businesses may choose to invest and hire more, which could mean more jobs are available.

If the Beige Book reports that is inflation high, the FOMC may decide to raise interest rates or reduce the money supply. These actions would have the opposite impact: you might pay a higher rate for a loan (especially those with adjustable rates), credit card interest rates rise and businesses may invest less, which can result in fewer job opportunities.

Beige Book FAQ

The Beige Book’s official name is “The Summary of Commentary on Current Economic Conditions by Federal Reserve District,” though its nickname comes from its beige cover.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stephanie Vozza
Stephanie Vozza |

Stephanie Vozza is a writer at MagnifyMoney. You can email Stephanie here