A certificate of deposit (CD) can be a powerful tool to help you reach your financial goals, but the right choice depends on your specific needs. Understanding how different CD types work —and their trade-offs —is the first step toward building an effective savings strategy.
Understanding CD pros and cons can help you determine if this account type aligns with your financial strategy.
What is a certificate of deposit?
A certificate of deposit is a bank product that earns interest on a lump-sum deposit for a fixed period of time. It's a type of account where you agree to leave your money untouched until the "maturity date" in exchange for a fixed interest rate. If you need to access your funds before the term ends, you may face an early withdrawal penalty, depending on the account terms.
Key differences between Ally Bank CDs
Choosing the right CD depends on your need for liquidity versus your desire for a high interest rate. At Ally, we offer several popular varieties to fit different goals.
CD Type | Key Feature | Pros | Cons |
|---|---|---|---|
Competitive fixed rates | Reliable, predictable growth with no minimum deposit to open. | Early withdrawal penalties apply if you need cash before maturity. | |
Liquidity and flexibility | Withdraw your full balance and interest any time after the first six days without a fee. | Rates may be lower than long-term High Yield CDs. | |
Take advantage of rising rates | Option to increase your rate if Ally's rates go up during your term. | You are limited to one or two rate increases depending on the term. | |
Tax-advantaged savings | Combines CD security with the tax benefits of a retirement account. | Subject to IRA contribution limits and potential IRS withdrawal penalties. |
Additional types of CDs
You may also come across other types of CDs that are not offered at Ally Bank. Some of these CDs are not FDIC insured, so it’s important to check the fine print:
Jumbo CDs: Which usually require a minimum balance of $100,000 or more.
Callable CDs: Can offer a higher annual percentage yield (APY) at the risk of the financial institution “calling” back the CD before maturity and reissuing it at a lower rate.
Add-on CDs: Allow you to make additional deposits to your CD account during the term.
Zero-coupon CDs: Do not pay interest throughout the term but are sold at a discount and redeemed at maturity for the full value, resulting in a profit for the owner.
Step-up CDs: Automatically raise their rate at periodic intervals during the CD term.
Foreign currency CDs: Are issued in foreign currencies but are bought with and converted back to US dollars at maturity.
Brokered CDs: Are issued by banks but bought and sold through a brokerage, similarly to bonds on the secondary market. They’re more liquid than deposit account CDs.
Pros of adding a CD to your savings plan
Are CDs a good investment? For many, the answer is yes, due to their unique benefits:
Fixed interest rates: Unlike a variable-rate savings account, your APY is locked in, making your future earnings more predictable.
Safety: One major advantage to opening a CD at member banks is that it is FDIC-insured up to the maximum amount allowed by law.
Higher yields: CDs often offer higher rates than traditional savings or money market accounts.
Variety: With terms ranging from three months to five years, you can choose a timeline that fits your specific goal.
Choosing the right CD depends on your need for liquidity versus your desire for a high interest rate.
Cons of using a CD for savings
CDs can be a great way to save, but there may be some trade-offs, including:
Fixed interest rates: While it can be a pro, it can also be a con - this means you might be stuck with a lower rate for a period of time if interest rates rise.
Withdrawal penalties: Taking money out early usually results in a loss of interest, which can reduce your overall return.
No added deposits: You typically cannot add money to a CD once it has been funded.
Lack of immediate access: Your cash is less liquid than it would be in a checking or savings account.
What to consider before choosing a CD
To decide if CDs are right for you, ask yourself:
When will I need the money?
How much can I expect to make using a CD?
What are the penalties if I need to take the money out early?
Whether you're exploring CDs for the first time or are a seasoned saver, weighing these trade-offs is the best way to help decide if a CD is right for you. At Ally Bank, we offer a variety of CD accounts in a range of terms and CD interest rates to help you reach your savings goals. There’s no minimum deposit to open and all of our bank CDs are backed by the Ally Bank Ten Day Best Rate Guarantee.
