A Certificate of Deposit most commonly comes in 3 and 6 month or 1,2,3,4 or 5 year terms. CD’s are insured deposits, so they offer an attractive investment option for those looking for low-risk. Once the CD is opened, your money is “locked” for the term of the account. Nearly every aspect of CD’s can be variable in some way. Interest rates, term length, and deposit amounts can all be different, depending on the needs of the account holder’s preferences.
While some CD’s can mature in as little as 30 days, most carry a term of at least 90 days. With variance of length comes fluctuation in interest. Longer terms usually yield a higher Interest rate. Since a CD is in essence a loan to the institution, early withdrawal may incur a penalty. If you feel that you may need the funds before the CD term is up (mature) the penalty may sting you worse than if the funds were originally placed in a savings account.
Rates on CD’s are usually higher than a traditional savings or money market account. Finding the best rate is simple
CD’s do not have a lot of downside. One of the worst things that can happen is a change in interest rate. If you have a 5 year CD at 3% interest, and the rate rises even a small amount during the term, depending on how much you have invested, you could be losing a considerable amount of interest payments. Unlike many retirement accounts, CD’s are not tax free. Taxes must be paid on interest earned from CD’s, just like savings accounts. Only one deposit can be made to a CD account. Additional funds can not be added to a CD during the term.
Because CD’s are FDIC insured, the depositor need not worry about losing the investment (up to $250,000).
When searching for CD rates, you should always compare your local bank rates to the internet bank rates available. Internet banks often have less overhead and can offer very competitive CD rates. When opening a CD, you should take the same approach you would when looking at credit card offers and carefully read the terms and conditions. In particular always know what the early withdrawal penalty is on your CD.