But this is your flaw - you are reinvesting the proceeds in a new CD either way, by taking out a loan or by cashing out the CD early. The only math that matters is the early withdrawal penalty compared to the ongoing borrowing cost.
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Agreed. So we have six or more months (could be twelve) of lost interest at the FULL interest rate of the CD . . . vs. āa couple of pointsā net interest cost for a quite possibly shorter interval of time.
Advantage borrowing.
Well if youāre going to assume an early withdrawal penalty of 12 monthās interest, than yes, itās going to make a lot of alternatives viable.
But remember, a 3 month EWP is (basically) going to be 1% of the balance on a CD with a 4% rate. A loan with a 1% spread for a year is (basically) going to be 1% of the balance. The EWP could be 1 month, 3 months, 1 year, whatever. And the loan spread could be .5%, 1%, 3%, whatever. As I said, the specifics are everything, there is no generic rule of thumb.
I took out a CD secured loan many years ago, thinking it would look good on my credit report and I might be able to make a small profit. The loan rate was of course, higher than the CD rate. If you can put it in a high interest savings account or CD even at a lower rate, you can finish slightly ahead because you have to make payments on the loan and halfway through the loan youāll be paying interest only on half the loan while gaining interest on the entire amount in savings or a CD.
Per the credit report, it noted that it was a secured loan, which I didnāt think it would do. The gain on interest was very marginal so I just paid it off as it didnāt seem worth the time and trouble.
If you have the money to pay off the loan, you might as well just put it directly into a savings vehicle rather than take a loan.
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Right. I just want to reiterate my agreement with goldendog as follows:
If you do not reinvest the funds itās an expensive approach. You lose all of your interest on your CD and, in addition, a couple of extra points of interest. Yup. That is expensive!
But if you open a new CD, quite possibly even at a higher rate of interest (though those options are vanishing even as I type), you will come out OK and, also, you will LOCK IN that higher interest rate out into the future well beyond (in my case) 2021. That locking in part, for at least a portion of my money, really appeals to me.
Not exactly sure if my math is right, but if you borrow against a CD that has a 3% rate and your interest rate is the 3% plus the 2% (could be higher) and invest in another CD with a 3% rate and borrow the funds for a year, I think it would be equivalent to an 8 month prepayment penalty. If the rate was 3% plus 3%, then the prepayment payment would be 12 months. I think this is right?
Also, there are tax implications. The borrowing cost would be considered investment interest and you could write it off as long you itemize your return. If you donāt, then you would be paying taxes on two CDs, the one you borrowed from and the new one. That would not be ideal.
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Agreed. Good insight there, goldendog. Taxation is for certain an important aspect to figure into the mix.
As I said, this is flawed thinking. What you do with the money has no effect on how much itās costing to withdraw it. Whether you want the cash to put into another CD or to go on a vacation, the act of getting that cash is going to cost you the same.
No one has even implied itād be a mistake for you to use the proceeds to fund a new CD, whatever your reasoning youāve decided itāll be more advantageous than keeping the current CD - and thatās fine. But thatās irrelevant to how you obtain those proceeds. A secured loan isnt cheap, and they generally arent advantageous for the circumstances youāve described.
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Thank you, Argyll, for that insight based on your experience. I had not considered need for incremental payments, I guess because I did not understand how it works. I have VERY little experience with loans of any kind. Usually I am lending money, not borrowing it. This has been true throughout my life.
But need for those incremental repayments of the loan would defeat my hoped-for strategy of reinvesting all the money into a new CD, where it would be locked up and unavailable. I would need a deal where my loan would not need to be repaid until the underlying CD actually matured. Guess that would be an interest-only loan, likely unavailable.
Want to thank everyone who contributed. Needed help and got it. Maybe Iām just gonna have to pay those early withdrawal penalties after all. Strategy there would be to wait for 30 day notice (if any), and not act as long as my add-on CDs remain available, up and running.
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News emerging this morning, for your information:
The ten year treasury yield has fallen below 1.25%. That is the lowest yield ever.
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I donāt see shinobiās idea as lucrative unless the exact circumstances warranted it. For example if a limited time 4% cd became available and if you had a cd that was within 6 months or less of maturing which had a steep EWP then it MIGHT pay to take the loan, purchase the 4% cd, especially if it had a nice long term of 4+ years.
Given the current situation with the coronavirus scares Iām not sure now is the best time to be playing this sort of thing but each person makes their own decision. Iām comfortable with waiting and farther down the line if cd rates are all terrible Iāll find a dividend appreciation etf with a decent rate and put my money there.
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Update
With the customary nod of thanks to scanchain, I can report my AST (automatic share transfer) adventure at PSECU continues apace and remains quite profitable. Earlier this morning was able to inject substantial additional funds at 3.25% APY. That closes out two months of success, with I hope more to come . . . . . which prompts this post.
I telephoned PSECU yesterday to inquire about funding failures I expect in April. Am bridging as best Iām able between maturing CDs, so far so good. But there will be a gap in early April and I was seeking to learn what fate might await me in this circumstance.
The response I received was somewhat hedged. Rep said āso farā there have been no injection privilege cutoffs in similar circumstances. But she would not commit to continuance of that protocol in future. For me this is a concern because:
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First of all the AST program was never intended, it was not conceived, for the purpose of allowing injection into CDs of huge sums of money. It was meant to serve members who, for example, wanted automatically to save a small portion of a biweekly paycheck.
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Second, this darn coronavirus is resulting is all sorts of market disruptions, and in particular in lower interest rates. So injecting large sums of money at 3.25% APY is becoming progressively more challenging for PSECU.
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Third, an injection interruption provides PSECU a very valid excuse to end a privilege they would prefer I suspect in any event to terminate. Heck, they might pull the program even absent an interruption!
So itās a crapshoot going forward. Iām good through March, though it will take almost every cent I have to maintain my existing injection commitments. After that itāll just be āhope for the bestā Iām afraid.
@shinobi one thing I did that helped me big time with ATS with the PSECU CDās was to change the monthly date of the transfer. For example I had originally set up my ATS to occur on the 7th of each month. They allowed me to change it to the 24th of the month recently. This gave me extra time to get funds to PSECU that month. From what the rep said, I believe we are able to make ongoing changes to this date. This may or may not help you with your situation of course but it did me and may help others.
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Many thanks for your input, zzz. Yes, that might indeed help me! I was unaware such changes were allowed.
I think your post is a big time help to me . . . and likely to other participants here as well!
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Just be sure weāre past the date you are changing to, or you might inadvertently trigger an earlier transfer instead of delaying it.
An important post has emerged at Kenās website. Another financial institution has cancelled, without notice, the add-on provision of its add-on CD. Obviously this is what GTE tried to do before they finally demurred. Here is a link:
Signal Financial changes terms of their add-on CD
As I wrote in my PSECU post not far up thread, all financial institutions are coming under additional pressure regarding add-ons as interest rates fall. Keep a weather eye.
For me personally, when (if) I get a 30 day add-on termination notice itāll be time to pay some early withdrawal penalties and extend maturities pronto. Without my add-ons . . . . . . . Iām cooked!
I have a very uneasy feeling about Kenās Freedom Northwest deal just posted. Iām not gonna post a link here. Go over and look at Kenās blog if you want to risk it.
I donāt know how to wire funds on a Saturday for Saturday arrival. And by Monday it will be March. At 3.2% for five years, were I in Idaho today, with a fist full of cash, I would jump in. But Iām not.
ETA
Oh, all right. I changed my mind about offering a link:
Link to Kenās Leap Day Saturday Idaho CD deal
Knock yourself out.
I have 2 CDās that mature at the end of this month. Fist full of cash then & probably be to late for this one. 
Bad news : CD wonāt be around at end of month
Good news: You have a fistful of cash
LOL
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