How to Get the Best Certificate of Deposit Rates
Could Choosing a More Flexible CD Give Higher Rates of Return?
Oct 27, 2009
It's common to use certificates of deposit as a low-risk savings medium. Many may simply opt to use traditional products but there are other options that may be worth investigating. Often known as flexible CDs, these may not all work in exactly the same way but may work out to be better for some investors. What options are on offer and how do they work?
Traditional vs. Flexible Certificates of Deposit
Standard products of this type tend to work in a very simple way. The individual agrees to invest a certain sum of money, for a set period of time. This gives them a fixed rate of interest return. There is no risk to their original investment unless they withdraw their money early. This may incur penalty clauses and charges which could eat into their original principal.
There are other types of CDs that may also be worth a look if this kind of investment is of interest. These may offer more flexible terms and the chance to earn higher rates of return. They may, for example, come with variable interest rates and the ability to make changes to terms and conditions.
Other Types of Certificates of Deposit
There are a few different options to choose from in the CD sector. These include:
- Add-on: This product is designed to allow investors to add to their original investment over time.
- Brokerage: Some brokers can sell on these products on behalf of other institutions and may offer higher rates of interest. In some cases they may be offered without early withdrawal penalties as the brokerage can sell on the product if an investor wants to back out.
- Bump Up: Some products will offer their investors a single bump up option that they can use once to increase interest rates during the term of the CD. This is designed to allow them to take advantage if markets rise.
- Callable: Here the CD comes with an attractive initial rate of interest which will apply for a call period. After this the issuer can reduce the rate if they wish by "calling" it.
- Liquid: This variation may give the investor more flexibility as they may be allowed to withdraw money from the CD without penalties.
- Step Up/Down: This deal will give a specific interest rate for an initial period after which time it will be increased or decreased according to the terms of the agreement.
- Variable rate: These deals don't come with a fixed interest rate but will pay variable returns depending on the market index they are connected to.
- Zero Coupon: These CDs are sold at lower than market value rates but will need to be held for longer periods before they give a return. Interest won't be paid on these products until the term is done.
In some circumstances individual investors may find that they get better options with more flexible products. There are, however, issues to consider before making a final decision.
Things to Check Before Opting For Flexible CDs
Reading the terms and conditions of any CD is a good idea, as is understanding how it works. Sometimes, what looks like a positive deal on paper, may not work so well. For example, individuals should check out whether the certificate of deposit comes with FDIC insurance backing as this isn't a given here.
It may also be wise to think about potential negatives. A callable option may have a great initial rate but, if it is called, then this may decrease. A liquid CD may look good but there may be conditions imposed on withdrawals and it may come with lower interest rates. The point here is to read the small print before making a decision. Using a CD comparison service may also be useful during the process to help find the best rates.
Sources: www.fdic.gov, www.bankrate.com
 |
 |
 |
 |
 |
