How to Use a CD to Pay Down a Loan

Certificates of deposit are the Swiss army knife of Wall Street they have lots of handy uses. One creative way to leverage your CD investment is to use it as collateral to pay down a loan.

But is it a good idea to use a CD to pay down debt and if so, what’s the best scenario to do so?

Let’s take a look under the hood.

First some basics. The Holy Grail in any loan payment campaign is to erase the interest payments on the debt that’s why you want to pay a debt off as fast as you can in the first place.

Take credit cards. The average interest rate on a national credit card is about 14%

Compare that to the 1.5% yield on the average two-year certificate of deposit, based on this week’s BankingMyWay National CD Rate Tracker.

So if you’re nearing the end of your two-year CD maturity, you can use the money from that account to pay off a credit card burdened with a much higher interest rate.

Let’s say, for example, that you have a $1,000 credit card debt, at that average interest rate of 14%. By using your CD to pay the debt off, you’d save $140 in interest over the course of a year (ex: $1,000 x 14.0% - $140).

Of course, you’d lose interest you could have earned by plowing the money back into that two-year CD at 1.5%. At a $1,000 investment, we’re not talking a lot of dough, however ($15).

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