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A certificate of deposit (CD) can be a useful tool for saving money for an upcoming goal. The downside is that you need to wait until the CD matures in order to access your money. If you withdraw some or all of your funds early, you typically get hit with a hefty penalty fee.

If you’re in a pinch and need cash quickly, however, you may be able to get a CD loan. Also known as a CD-secured loan, this is a type of personal loan that uses the value of a CD account as collateral. CD loans are offered by some banks and credit unions. Typically, the lender needs to be the same institution that holds your CD.

Here’s a closer look at how CD loans work and how they stack up against unsecured personal loans.

What Is a CD Loan?

A CD loan is a type of personal loan that is secured by the money you have in a CD. Since the collateral lowers the risk for the lender, these loans can be easier to qualify for and have lower interest rates than unsecured loans. However, if you don’t repay the loan, the bank can take the money out of your CD to cover their losses.

Of course, to get a CD loan, you need to have a CD, which is a type of savings account that pays a fixed interest rate over a set amount of time, or term. You must leave the money untouched for the CD term, which can range from three months to five years. If you withdraw your funds before the end of the CD’s term, you usually have to pay an early withdrawal penalty. CDs generally pay a higher annual percentage yield (APY) than regular savings accounts. And the longer the CD’s term, usually the higher the APY. Similar to other types of savings accounts, CDs come with FDIC protection, up to the applicable limits.

How Do CD-Secured Loans Work?

If you take out a CD loan, the lender will charge interest. So you’ll be earning interest on the CD but paying interest on the CD-secured loan. In some cases, a bank or credit union will set the minimum annual percentage rate (APR) on their CD loans at 2% over the CD rate. So if your CD pays 3%, your CD loan rate would start at 5%. Your actual rate would depend on your credit and the term of the loan, among other factors.

How much you can borrow with a CD-secured loan depends on the lender. Often, you are able to borrow up to 100% of the value of your CD principal. The term of the loan can generally be as long as the term of the CD.

While you can typically access money in a CD if absolutely necessary and pay a penalty, that may no longer be the case if you get a CD loan. Typically, the funds being used as collateral are sealed even in the event of an emergency.

Who Might CD Loans Be Right For?

The idea of paying interest on a loan backed by an interest-bearing CD may seem counterintuitive. However, there can be some logical reasons for taking out a CD-secured loan. One is that you may be able to build your credit by taking out a CD loan and then making a series of on-time payments on the loan. More common ways to do that include getting a secured credit card or becoming an authorized user on another person’s credit card. But if those options aren’t available, and you have a CD, you might use a CD loan for that purpose.

Another reason you might opt for a CD loan is that you need access to your funds for an emergency before it matures. However, you’ll want to first check what your CD’s early withdrawal penalty is. It might be cheaper and easier to simply break open a CD early and pay the penalty. However, if the penalty would be more than what you’d pay in a CD loan’s fees and interest, you might consider a CD loan.

Before taking out a CD loan, it makes sense to weigh the pros and cons.

CD Loan Pros

•   Lower interest rates CD-secured loans often have lower interest rates compared to credit cards and unsecured personal loans, making them an attractive option for borrowers seeking lower borrowing costs.

•   Building credit CD loans offer an opportunity to establish or improve your credit history if you currently have limited or no credit.

•   Retaining CD benefits Despite using the CD as collateral, you can still earn interest on the deposited amount.

•   Fast access to funds If you apply for a CD loan with the bank or credit union that holds your CD, you can often get approved quickly and receive funds within a day or two.

•   Good for those with bad credit Borrowers with poor credit often qualify for CD-secured loans.

CD Loan Cons

While CD loans have their benefits, there are also some drawbacks to keep in mind.

•   Frozen funds The funds in the CD are tied up as collateral, limiting access to the money until the loan is repaid.

•   Potential loss of CD If you default on the loan, the lender can seize the CD, resulting in the loss of the deposited funds.

•   Limited loan amount CD loans are typically limited to a percentage of the CD’s value, which might not meet your full borrowing needs.

•   Fees Your bank may charge fees, such as an origination fee, for issuing you a CD loan.

•   Hard to find CD loans aren’t as common as other types of personal loan, so your bank or credit union may not offer them.

CD Loan vs Personal Loan

While CD-secured loans and unsecured personal loans have some similarities, they also have some significant differences.

With both types of loans, you get a lump sum of money up front and can then use those funds for virtually any type of expense. Both also typically offer fixed interest rates and a set repayment term so payments are easy to predict and budget for.

Unlike a personal loan, however, a CD-secured loan can be hard to find. Also with a CD loan, you need to put your savings on the line to secure the loan. With an unsecured personal loan, you don’t need to provide any funds or personal assets as collateral, making them accessible to borrowers without a CD or other assets.

CD loans also tend to have lower interest rates than unsecured personal loans due to the collateral, while personal loans tend to offer more flexibility in loan amount and repayment terms.

Recommended: Typical Personal Loan Requirements Needed for Approval

The Takeaway

CD loans can be a viable option for someone who has a certificate of deposit and needs access to funds while keeping their deposited amount intact. The lower interest rates and potential credit-building opportunities make CD loans attractive for some borrowers.

However, these loans aren’t widely available and the cost of the loan could potentially exceed the CD’s early withdrawal fee. Also, you could lose the money in your CD if you have difficulty making payments. It’s crucial to weigh the pros and cons, consider your personal financial goals and needs, and compare loan options before deciding on the best borrowing solution.

If you’re interested in exploring personal loans, SoFi could help. SoFi’s unsecured personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.

FAQ

Where can I get a CD loan?

CD loans are typically offered by banks and credit unions. It’s best to start by contacting your current financial institution to inquire about their CD loan options. They can provide you with specific details about their loan terms, interest rates, and application process. Typically, you need to take out a CD loan from the same institution that holds your CD.

What are CD loan interest rates?

CD loan interest rates vary depending on the lender, current market conditions, and your qualifications as a borrower. Rates tend to be lower than those of unsecured personal loans, since the loan is backed by the funds in the CD.

Some banks and credit unions will set the minimum annual percentage rate (APR) on their CD loans at 2% over the CD rate. So if your CD pays 3%, your CD loan rate would start at 5%. Your actual rate would depend on your credit and the term of the loan, among other factors.

Do you get money back from a CD loan?

When you take out a CD loan, you do receive money from the lender. However, it’s important to note that the funds received are borrowed money that you are obligated to repay, typically with interest. The funds from the loan are separate from the funds you have deposited in a certificate of deposit. The CD itself remains intact and continues to earn interest, but it is held as collateral until the loan is repaid. Once the loan is fully repaid, you regain full access to your CD and any interest it has earned during the loan term.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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Cyclical investing means understanding how various stock sectors react to economic changes. A cyclical stock is one that’s closely correlated to what’s happening with the economy at any given time. The performance of non-cyclical stocks, however, is typically not as closely tied to economic movements.

Investing in cyclical stocks and non-cyclical stocks may help to provide balance and diversification in a portfolio. This in turn may help investors to better manage risk as the economy moves through different cycles of growth and contraction.

Cyclical vs Non-Cyclical Stocks

There are some clear differences between cyclical vs. non-cyclical stocks, as outlined:

A cyclical investing strategy can involve choosing both cyclical and non-cyclical stocks. In terms of how they react to economic changes, they’re virtual opposites.

Cyclical stocks are characterized as being:

•   Strong performers during periods of economic growth

•   Associated with goods or services consumers tend to spend more money on during growth periods

•   Highly sensitive to shifting economic cycles

•   More volatile than non-cyclical stocks

When the economy is doing well a cyclical stock tends to follow suit. Share prices may increase, along with profitability. If a cyclical stock pays dividends, that can result in a higher dividend yield for investors.

Non-cyclical stocks, on the other hand, share these characteristics:

•   Tend to perform well during periods of economic contraction

•   Associated with goods or services that consumers consider essential

•   Less sensitive to changing economic environments

•   Lower volatility overall

A non-cyclical stock isn’t completely immune from the effects of a slowing economy. But compared to cyclical stocks, they’re typically less of a roller-coaster ride for investors in terms of how they perform during upturns or downturns. A good example of a non-cyclical industry is utilities, since people need to keep the lights on and the water running even during economic downturns.


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Cyclical Stocks

In the simplest terms, cyclical stocks are stocks that closely follow the movements of the economic cycle. The economy is not static; instead, it moves through various cycles. There are four stages to the economic cycle:

•   Expansion. At this stage, the economy is in growth mode, with new jobs being created and company profits increasing. This phase can last for several years.

•   Peak. In the peak stage of the economic cycle, growth begins to hit a plateau. Inflation may begin to increase at this stage.

•   Contraction. During a period of contraction, the economy shrinks rather than grows. Unemployment rates may increase, though inflation may be on the decline. The length of a contraction period can depend on the circumstances which lead to it.

•   Trough. The trough period is the lowest point in the economic cycle and is a precursor to the beginning of a new phase of expansion.

Understanding the various stages of the economic cycle is key to answering the question of what are cyclical stocks. For example, a cyclical stock may perform well when the economy is booming. But if the economy enters a downturn, that same stock might decline as well.

Examples of Cyclical Industry Stocks

Cyclical stocks most often represent companies that make or provide things that consumers spend money on when they have more discretionary income.

For example, that includes things like:

•   Entertainment companies

•   Travel websites

•   Airlines

•   Retail stores

•   Concert promoters

•   Technology companies

•   Car manufacturers

•   Restaurants

The industries range from travel and tourism to consumer goods. But they share a common thread, in terms of how their stocks tend to perform during economic highs and lows.

Examples of Non-Cyclical Industry Stocks

Non-cyclical industry stocks would be shares of companies that are more insulated from economic downturns than their cyclical counterparts. It may be easier to think of them as companies that are probably going to see sales no matter what is happening in the overall economy. That might include:

•   Food producers and grocers

•   Consumer staples

•   Gasoline and energy companies

Cyclical Stock Sectors

The stock market is divided into 11 sectors, each of which represents a variety of industries and sub-industries. Some are cyclical sectors, while others are non-cyclical. The cyclical sectors include:

Consumer Discretionary

The consumer discretionary sector includes stocks that are related to “non-essential” goods and services. So some of the companies you might find in this sector include those in the hospitality or tourism industries, retailers, media companies and apparel companies. This sector is cyclical because consumers tend to spend less in these areas when the economy contracts.

Financials

The financial sector spans companies that are related to financial services in some way. That includes banking, financial advisory services and insurance. Financials can take a hit during an economic downturn if interest rates fall, since that can reduce profits from loans or lines of credit.

Industrials

The industrial sector covers companies that are involved in the production, manufacture or distribution of goods. Construction companies and auto-makers fall into this category and generally do well during periods of growth when consumers spend more on homes or cars.

Information Technology

The tech stock sector is one of the largest cyclical sectors, covering companies that are involved in everything from the development of new technology to the manufacture and sale of computer hardware and software. This sector can decline during economic slowdowns if consumers cut back spending on electronics or tech.

Materials

The materials sector includes industries and companies that are involved in the sourcing, development or distribution of raw materials. That can include things like lumber and chemicals, as well as investing in precious metals. Stocks in this sector can also be referred to as commodities.

Cyclical Investing Strategies

Investing in cyclical stocks or non-cyclical stocks requires some knowledge about how each one works, depending on what’s happening with the economy. While timing the market is virtually impossible, it’s possible to invest cyclically so that one is potentially making gains while minimizing losses as the economy changes.

For investors interested in cyclical investing, it helps to consider things like:

•   Which cyclical and non-cyclical sectors you want to gain exposure to

•   How individual stocks within those sectors tend to perform when the economy is growing or contracting

•   How long you plan to hold on to individual stocks

•   Your risk tolerance and risk capacity (i.e. the amount of risk you’re comfortable with versus the amount of risk you need to take to realize your target returns)

•   Where the economy is, in terms of expansion, peak, contraction, or trough

For example, swing trading is one strategy an investor might employ to try and capitalize on market movements. With swing trading, you’re investing over shorter time periods to reap gains from swings in stock prices. This strategy relies on technical analysis to help identify trends in stock pricing, though you may also choose to consider a company’s fundamentals if you’re interested in investing for the longer term.

How to Invest in Cyclical Stocks

Investors can invest in cyclical stocks the same way they do any other type of stock: Purchasing them through a brokerage account, or from an exchange.

One way to simplify cyclical investing is to choose one or more cyclical and non-cyclical exchange-traded funds (ETFs). Investing in ETFs can simplify diversification and may help to mitigate some of the risk of owning stocks through various economic cycles.

Recommended: How to Trade ETFs: A Guide for Retail Investors

The Takeaway

Cyclical stocks tend to follow the economic cycle, rising in value when the economy is booming, then dropping when the economy hits a downturn. Non-cyclical stocks, on the other hand, tend to behave the opposite way, and aren’t necessarily as affected by the overall economy.

Investing around economic cycles is a viable strategy, but it has its potential pitfalls. Investors who do their homework may be able to successfully invest around economic cycles, but it’s important to consider the risks involved.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

What are indicators of cyclical stocks?

A few examples of indicators of cyclical stocks include the earnings per share data reported by public companies, which can give insight into the health of the economy, along with beta (a measure of volatility of returns) and price to earnings ratios.

What is the difference between cyclicality vs. seasonality?

While similar, cyclicality and seasonality differ in their frequency. Seasonality refers to events or trends that are observed annually, or every year, whereas cyclicality, or cyclical variations can occur much less often than that.

How do you mitigate the risk of investing in cyclical stocks?

Investors can use numerous strategies to mitigate the risk of investing in cyclical stocks, such as sector rotation and dollar-cost averaging.

Photo credit: iStock/Eoneren

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.