I Need Money During COVID-19. Should I Cash Out a CD Early?

The cash you have in a CD could be a lifeline right now -- despite the drawbacks of withdrawing it early.

The cash you have in a CD could be a lifeline right now -- despite the drawbacks of withdrawing it early.

Many Americans are struggling financially during the COVID-19 pandemic. If you're in need of money, the first place to go is emergency savings. But what if you've already depleted your regular savings account, and have some money in a certificate of deposit? Should you cash out your CD during this crisis?

The downside of cashing out a CD

The potential problem with putting money into a CD is that if you cash out early, you'll be penalized.

There's no preset penalty for cashing out a CD: The penalty you pay depends on your bank and the term of your CD. But for a one-year CD, you can expect to lose about three months' worth of interest by cashing out before the end of the term.

Clearly, losing that interest isn't ideal. But if you're desperate for money, it may be a smart way to go.

Why it can pay to cash out a CD

If you're in a tight spot financially, cashing out a CD might cost a lot less than borrowing money. And that's why it could be a smart move.

Say you have $5,000 in a one-year CD. If it's paying you 2% interest, you're getting $100 in interest for that year. If you cash it out early, you'll likely lose three months' interest -- or about $25. Losing $25 is hardly something to cry over if it spares you from debt.

By contrast, let's say you borrow $5,000 at an interest rate of 9%
(which is what you might pay with a personal loan). We'll assume you pay that loan off over five years. Over those five years, you'll spend over $1,200 on interest. Even if you pay the loan off in a year, you're still looking at almost $250 in interest -- 10 times what you'd lose by cashing out a CD early.

What about a CD loan?

There's one other option to consider before cashing out a CD: You may be able to take out a CD loan instead. With a CD loan, you borrow against your CD and pay the money back.

With a CD loan, you avoid the early cash-out penalty. But with a CD loan, you might pay a loan origination fee.

If you're thinking about taking out a few thousand dollars, the difference in savings between a loan and a cash-out will be minimal.

Should you cash out your CD early?

If you're fortunate enough to have some money in a CD and you're having a hard time paying your bills due to the pandemic, cashing it out may be your best bet. True, losing out on some interest isn't a great thing. But it's a small price to pay for the ability to pay your bills.

Of course, it also pays to explore other types of coronavirus relief that may be available to you. Your landlord might let you defer rent for a while, and your utility companies might give you more time to pay your bills. But if you still need money, your CD is a good place to get it.