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Pros and cons of certificates of deposit (CDs)

What we'll cover

  • Types of certificates of deposit

  • Benefits and drawbacks of CDs

  • How to determine if a CD is right for you

A certificate of deposit (CD) might seem like an easy, safe way to stash your savings and earn some interest while you’re at it, but finding the right tool depends on your unique financial situation and the goals you may have for the savings you’re stashing. So how do you know if a CD is right for you?

To help you decide whether a CD is right for you, we’ve created a certificate of deposit pros and cons chart below, followed by the benefits of a CD and information about what to consider before you make your decision. Let's jump in.

What is a certificate of deposit?

A certificate of deposit (CD) is a bank product in which you earn interest on a lump-sum deposit. When you purchase a CD, you agree to leave money in the bank for a certain period of time. You must leave it in for the full term or for many types of CDs, risk paying a withdrawal penalty  if you take it out early. (More on early withdrawal penalties later.)

There are different types of CDs, all of which all come with different advantages so you can choose from a variety of certificates of deposit with different term lengths and features to fit your specific goals. Several popular types of CDs, all of which are offered by Ally, include:

No penalty CDs: Also called “liquid CDs”, these allow you to withdraw money before the maturity date without penalty. Ally Bank’s  No Penalty CD  allows you to withdraw your full balance and interest any time after the first six days of funding.

High yield CDs: Usually have higher-than-average fixed interest rates. In exchange, high yield CDs may have longer terms and require a larger deposit. With an Ally Bank  High Yield CD , you can open and fund with any amount.

Raise Your Rate CDs:  Also known as “bump up” CDS, allow you to take advantage of rising interest rates without worrying about the potential downward adjustments of a variable rate. Ally Bank’s  Raise Your Rate CDs  give you the option of a one-time rate increase if our 2-Year CD rate goes up and the option to increase your rate twice if our 4-Year CD rate goes up.

IRA CDs: Let you take advantage of the tax benefits of an Individual Retirement Account (IRA) with the security of a deposit account. Ally Bank offers both  High-Yield and Raise Your Rate CDs  for an IRA.

You may also come across other types of CDs that are not offered at Ally Bank. Some of these CDs are not FDIC insured. Some of these other types of CDs include:

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.

Choosing the right CD requires some thinking about your savings goals. The more you nail down the specifics, the easier it will be to choose the best CD for you.

Pros of adding a CD to your savings plan

CDs offer some distinctive advantages, including the following:

Potentially higher rates: You may find that CDs have higher APYs (annual percentage yields) compared to regular savings accounts or money market accounts, especially for long-term CDs.

Fixed rates: CDs often offer fixed rates for fixed terms. Knowing your rate is going to stay the same for your term helps you accurately estimate your earnings and makes planning for the future that much easier.

Security: The Federal Deposit Insurance Corporation (FDIC) insures deposits at member banks like Ally Bank up to the maximum amount allowed by law.

Convenience: You can open many types of CDs  at most banks and credit unions for a variety of savings goals.

Pro tip: Online banks like Ally Bank allow you to open a CD whenever and wherever you like. Just double-check that any online bank you consider belongs to the FDIC.

Cons of using a CD for savings

CDs can be a great way to save, but there may be some trade-offs, including the following:

Rates: While CDs may offer better rates than other deposit accounts, they may not compete with the potential returns you can get with investments like stocks and bonds, which might be better suited for long-term financial goals.

Fixed rates: Fixed interest rates offered by CDs means you might be stuck with a lower rate if interest rates rise. Some banks offer “bump-up CDs,” which give you the option of increasing your rate at some time over the course of your CD term.

Withdrawal penalties: You usually must keep money in the CD until the end of its term, or until maturity. If you need your money before then, you’ll likely pay an early withdrawal penalty. However, a withdrawal penalty might also help incentivize leaving money in the CD to let it grow.

Access: Keeping your money in the CD until maturity means you can't access your money whenever you want, the way you can with a savings or checking account.

What to consider before investing in a CD

Consider putting your goals top of mind when you're juggling the pros and cons of investing in a CD. 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?

If you’ve weighed the pros and cons and decided to invest in a CD, here are a few considerations:

Compare rates and terms. Take a look at the highest APYs. Just be sure to read the fine print and watch for things like promotional rates and withdrawal penalties before you commit.

Get the right CD for your situation. There are many different types of CDs suited to short- or long-term goals that offer competitive APYs and flexible terms.

Consider CD laddering. A CD ladder can be a useful way to earn a return and still maintain more frequent access to your cash. The basic idea of a CD ladder is that you open several CDs with varying maturity dates so that a portion of your money is accessible on a regular basis.

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.

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