When you invest in a CD, you deposit a fixed amount of money over a fixed term with a bank or other financial institution. The term may run from just a few months to several years. The bank pays interest on your deposit. At the end of the fixed term, you receive your principal and the accrued interest. While CD interest rates have been low in recent years, they remain a safe investment with higher rates than standard savings accounts.
Begin with a survey of CD rates offered in your local area. Broaden your search to online and non-local institutions with the Money Saving Pro Review of CD Rates. Consider credit unions too-as non-profit organizations, they are able to offer competitive rates. Banks and credit unions sometimes offer limited-time promotional or bonus rates on CDs in an effort to beef up deposits. Long Term and Brokered CDs tend to offer higher rates, as do Jumbo CDs of $100,000 or more.
Brokered CD With High Interest
Brokerage firms and independent financial services salespeople offer CD products often with higher interest rates than those available from banks. These "deposit brokers" negotiate a higher rate of return by committing to bring a large amount of deposits to a particular financial institution. Be sure to do a diligent background check on the deposit broker before investing.
Pros and Cons of Long-Term CD Rates
Long-term CDs, for example with a 5-year term, offer higher rates than shorter term CDs. They are a good choice if you don't need the money for a few years. You must weigh the higher rate against the fact that interest rates change over time. Should interest rates increase while you hold funds in a 5-year CD, you must ride out the term with the lower rate. On the other had, if interest rates fall, the bank must pay the rate you've locked in.
Terms and Disclosures
Review the disclosure documents that come with your CD. They detail the terms of the CD, including the interest rate, whether the rate is fixed or variable, and how and when you will be paid. If you invest in a brokered CD, pay careful attention to the fine print, as these products tend to have more complicated terms than CDs issued by banks or credit unions. If you withdraw money from the CD before the end of it's term, you will likely lose interest and possibly pay a penalty. Check these tips from the Securities and Exchange Commission on investing in CDs.
Choose a CD that Fits Your Needs
While a high interest rate is important, be sure to invest in a CD that you are comfortable with. Do you want to tie up funds for five years in return for a higher rate? Is a brokered CD worth the potential risks involved? Many people are more at ease purchasing a CD from a bank or a credit union.