Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
These are the loans where a bank lends you (for example) $10,000, but you must establish a CD or savings account with that bank in the amount of $10,000 as collateral and you can't touch the account until the loan is paid back. Is this just for people with bad (or no) credit who are trying to establish credit? I can't see how this type of loan benefits the borrower.
We actually used this to get into our first apartment complex. Funds were locked up in a CD but at that time you could borrow up to 90% at a rate of 2% over the rate they were paying you for the CD. Right now CD rates are very low so if your money is locked up for a whopping 1% return then you could borrow money back for 3%. When the CD matures - you have the option of paying off the loan or renewing the CD and also renewing the loan at 2% over the new locked in CD rate.
We actually used this to get into our first apartment complex. Funds were locked up in a CD but at that time you could borrow up to 90% at a rate of 2% over the rate they were paying you for the CD. Right now CD rates are very low so if your money is locked up for a whopping 1% return then you could borrow money back for 3%. When the CD matures - you have the option of paying off the loan or renewing the CD and also renewing the loan at 2% over the new locked in CD rate.
Thanks Dale, but I'm still not understanding it--if the same amount of money that you borrow is trapped in the CD for the term of the loan, how do you benefit from doing this type of loan? It seems almost like paying someone else interest to borrow money that you already have.
On the other hand, if you have good credit, you can try to leverage it. Just pulling numbers out of the air here. Pledge $10k against of loan of $30k.
Yes, that makes total sense to me. However, the places I have spoken to however have wanted the same amount in the CD as the loan amount, which made no sense. I asked them about putting down a smaller amount than the loan and they were totally inflexible.
My situation was a little different. The money was already trapped in the CD and I wanted to use it for investments. If I closed the CD then there is a penalty. Instead I borrowed the money to use for a down payment for an apartment and as far as I was concerned - it was a 2% loan to me to use for the down payment. Just putting money in a CD and then borrowing it back would be just for you to build up credit. Hope this makes it a little clearer for you.
Yes, that makes total sense to me. However, the places I have spoken to however have wanted the same amount in the CD as the loan amount, which made no sense. I asked them about putting down a smaller amount than the loan and they were totally inflexible.
You may be speaking to the wrong people or the wrong banks. It's hard for me to give you advice without knowing what the goal is, who you are approaching, and what you are telling them. I can tell you that business/commercial bankers understand leveraging assets.
Yes, that makes total sense to me. However, the places I have spoken to however have wanted the same amount in the CD as the loan amount, which made no sense. I asked them about putting down a smaller amount than the loan and they were totally inflexible.
You may be speaking to the wrong people or the wrong banks. It's hard for me to give you advice without knowing what the goal is, who you are approaching, and what you are telling them. I can tell you that business/commercial bankers understand leveraging assets.
I was turned down for a HELOC by a commercial bank and then that bank suggested a collateral loan instead (with the terms mentioned above). I was skeptical about it so I posted here. I called the credit union to see what they offered and they had the same terms (100% of loan amount required in CD)
I've heard of people using these with a new LLC or business entity to begin establishing credit and payment history under the business in their journey to shift all business activity out of their personal name. I've got no first hand knowledge of it though.
As mentioned above, if money was locked up in a CD and the interest rate you could borrow at was less than the penalty for early withdrawal, it may work out. Especially if you're buying a profitable flip or something that you won't be holding on to for very long.
I'd think after you had a payment history with your entity you could start switching to a 75% secured, 25% unsecured loan until eventually you were primarily unsecured. Anyone do this successfully?