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Best CD Rates (up to 5.35% APY) April 2024

Certificates of Deposits (CDs) offer a straightforward approach to investing, providing a fixed Annual Percentage Yield (APY) for a set term. They frequently provide higher interest rates compared to your typical savings account. Explore and compare CDs, and start increasing your interest today!

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Overview

Capital One was founded in 1988 in Richmond, Virginia, and has become one of the most recognized names in finance. It originated as a credit card company but has since expanded its services, now offering a wide range of financial products, including banking, loans, and investment solutions. Their main attraction is leveraging technology to provide more innovative financial solutions that can be tailored to individual needs. Capital One sets itself apart with its user-friendly platforms and digital tools that can simplify business and personal finance for its customers.

Pros

pros iconNo minimum deposit requirement

pros iconCompetitive interest rates

pros iconFlexible terms

Cons

cons iconLow APYs on some term lengths

cons iconEarly withdrawal penalties

  • No minimum Min. deposit
  • 5.10% 1-Year APY
  • 4.00% 3-Year APY
  • 3.90% 5-Year APY
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Overview

Marcus is a personal loan and online banking provider owned by Goldman Sachs. Marcus was launched in 2016 to offer products designed to address consumer pain points regarding personal finance.

Marcus is named after Goldman Sachs’ founder, and its online platform combines digital technology with the financial strength and 150-year history of Goldman Sachs. Marcus has over $50 billion in bank deposits and $5 billion in consumer loan balances in the United States and the United Kingdom, all without the traditional brick-and-mortar branch model.

Marcus is a public company: stock ticker NYSE: MCS

Pros

pros iconHigh APYs

pros iconLow minimum deposit

pros iconNo monthly fees

Cons

cons iconEarly withdrawal penalties

cons iconFDIC-insured only up to $250,000.

cons iconNot a liquid investment

  • $500 Min. deposit
  • 4.90% 1-Year APY
  • 4.15% 3-Year APY
  • 4.00% 5-Year APY
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Overview

Initially launching as a credit card company, Discover was created by Sears in 1985. Since then, the company has branched out into a fully-fledged financial institution and is one of the biggest financial brands in America. Discover provides online banking services, personal loans, student loans, and mortgages, all alongside its famous Diners Club credit card offering.

Currently based in Riverwoods, Illinois, Discover has more than 50 million customers in the US and over 17,000 employees. The financial powerhouse offers all the benefits of a full-service bank with an excellent online presence and top-quality customer service.

Discover is a public company: stock ticker NYSE: DFS

Pros

pros iconDaily compounding interest

pros iconMany term options

pros iconLonger terms earn higher APYs

Cons

cons icon$2,500 minimum deposit

cons iconAutomatic renewal upon maturity

  • $3K Min. deposit
  • 4.70% 12-Month APY
  • 3.75% 3-Year APY
  • 3.75% 5-Year APY
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Overview

Synchrony is a premier consumer financial services company born out of GE capital and an independent entity as of 2014. With its original roots going back to 2003, this Stamford, Connecticut-based company specialized in offering a wide range of credit products. They partner with many national and regional retailers, local merchants, manufacturers, industry associations, and healthcare service providers to tailor their credit solutions for varying consumer needs. They have extensive industry knowledge and innovative solutions, providing a strong commitment to their partnerships. Synchrony’s edge lies in understanding the distinct financial needs of its consumers and bridging the gap

Pros

pros iconVariety of CD terms

pros iconCompetitive rates

pros iconNo-Penalty and Bump-Up CDs each only have one term

pros iconNo minimum deposit

Cons

cons iconNo terms over 5 years

  • No minimum Min. deposit
  • 4.80% 12-Month APY
  • 4.15% 36-Month APY
  • 4.00% 60-Month APY
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Overview

Quontic Bank is an online-only, FDIC-insured bank based in New York City, NY. The bank offers multiple deposit account options with reasonable opening deposit limits and competitive annual percentage yields (APYs). Quontic Bank’s primary goal is to innovate on traditional banking without losing the personal connection with its customers.

Along with bank accounts, Quontic offers member-exclusive financial products and opportunities, including loans. Borrowers can use these loans for things like down payment assistance on their home.

Pros

pros iconNo monthly fees

pros iconCompetitive rates on savings account and CDs

pros iconExtended phone customer service

Cons

cons iconNo branch access

cons iconNo checking account

cons iconExcess withdrawal fees

  • $500 Min. deposit
  • 4.50% 1-Year APY
  • 4.40% 3-Year APY
  • 4.30% 5-Year APY
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Overview

Alliant Bank has operated under its existing brand since December 2003. However, the company’s history can be dated back to 1888. With five physical branches in Northern and Central Missouri, Alliant Bank offers both online personal and business banking. The financial company is also a full-service bank registered with the FDIC. Alliant Bank’s ethos is firmly built around community partnership and working together with its customers on a personal basis.

Alliant Bank is a public company: stock ticker NASDAQ: LNT

Pros

pros iconCompetitive rates, especially on long-term CDs

pros iconFDIC insured

pros iconCD laddering

Cons

cons icon$1,000 minimum deposit

cons iconInterest compounded monthly, not daily

  • $1K Min. deposit
  • 5.15% 12-Month APY
  • 4.20% 36-Month APY
  • 4.00% 60-Month APY
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Overview

Ally Bank is headquartered in Sandy, Utah and was founded in 2009. As a full-service online bank, it offers its customers competitive interest rates, no minimum balance requirements, low fees, and round the clock customer service. Ally Bank is the digital banking division of Ally Financial Inc., and has roots that date back for nearly a century. Ally is best suited to customers who are familiar with online banking using a PC, tablet, or mobile device. The bank offers checking, savings, money market and certificate of deposit accounts. In addition, it also offers personal and auto loans, mortgages, investment accounts, and retirement services.

Ally is a public company: stock ticker NYSE: ALLY

Pros

pros icon24/7 customer service

pros iconNo monthly maintenance fees

pros iconNo minimum balance requirements

pros iconZero overdraft fees

Cons

cons iconNo cash deposit

cons iconNo branch access

cons iconEarly withdrawal penalties

  • No minimum Min. deposit
  • 4.50% 12-Month APY
  • 4.00% 3-Year APY
  • 3.90% 5-Year APY
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Overview

Pentagon Federal Credit Union (PenFed) was established in 1935 and has grown to become the third largest credit union in the US. The company boasts over 2.8 million members and caters to individuals in all 50 states, with more than $36 billion of assets under management. PenFed offers a wide range of financial products, including mortgages, personal loans, HELOC, student loans, and student loan refinancing.

Headquartered in Virginia, the company holds valid regulation with the National Credit Union Administration. PenFed is also known for its competitive interest rates and attractive features, such as spousal loan refinancing.

Pros

pros iconWide selection of terms

pros iconMinimum deposit as low as $500

pros iconFDIC-Insured up to $250,000

Cons

cons iconSteep early withdrawal penalty for certificates

cons iconMust open and maintain a savings account to become a member.

cons iconSome minimums required to avoid fees

  • $500 Min. deposit
  • 4.20% 1-Year APY
  • 3.60% 3-Year APY
  • 3.40% 7-Year APY
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Overview

Popular Direct traces its lineage back to 1893, as it’s a subsidiary of Popular, Inc., which was founded in Puerto Rico. With over a century of banking expertise, the company has emerged as a significant financial player, focusing on providing its customers with high-yield savings products and competitive CD rates. Their commitment to deliver seamless online banking experiences has led to massive technological advances. The main selling point for Popular Direct is its dedication to offering attractive interest rates. While many banks have expanded services, this company focuses on high-yield opportunities, specializing where others have broadened.

Pros

pros iconAccounts with highly competitive rates

pros iconNo monthly fees

pros iconExtended phone customer service hours

Cons

cons iconHigh minimum deposit requirements

cons iconExcess withdrawal fees

cons iconThe mobile app has limited capabilities and low customer ratings

  • $10K Min. deposit
  • 5.15% 1-Year APY
  • 4.55% 36-Month APY
  • 4.45% 60-Month APY
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Overview

Sallie Mae has been around since as far back as 1973, originally setting up as a student loan program that was federally guaranteed. It has been a private company since 2004. While it has not been servicing any federal loans since 2014, it still focuses on providing private student loans. One of its main focuses is catering to students who are looking for flexible repayment terms.

Sallie Mae is a public company: stock ticker NASDAQ: SLM

Pros

pros iconCompetitive rates on CDs

pros iconVarious types of accounts for short term savings

pros iconNo monthly fees

Cons

cons iconNo physical locations

cons iconLimited customer support phone hours

  • $3K Min. deposit
  • 4.95% 12-Month APY
  • 4.00% 36-Month APY
  • 4.00% 60-Month APY
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Overview

First National Bank (F.N.B.) Corporation, a diversified financial services entity headquartered in Pittsburgh, Pennsylvania, has a legacy tracing back to 1864 with the establishment of its chief affiliate, First National Bank of Pennsylvania. Operating across seven states and the District of Columbia, F.N.B.’s service offerings are broad, from commercial and consumer banking to wealth management. The bank’s footprint spreads across major metropolitan territories, including Pittsburgh, Baltimore, Cleveland, and Washington, D.C., among others. With assets nearing $44 billion as of the end of 2022, and an extensive network of around 350 banking offices, F.N.B. demonstrates a unique blend of traditional banking and innovative financial solutions. The company is publicly traded under the stock ticker “FNB” on the New York Stock Exchange.

Pros

pros iconOffers competitive interest rates on its CDs

pros icon900+ ATMs

pros iconMultiple account options

Cons

cons iconTransfer fee if you use overdraft protection

cons iconLow annual percentage yields for most accounts

cons iconInterest compounded monthly or quarterly, not daily

  • $500 Min. deposit
  • 5.00% 13-Month APY
  • 3.00% 35-Month APY
  • 3.00% 61-Month APY
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Overview

First National Bank of America (FNBA), headquartered in East Lansing, Michigan, has a proud history dating back to 1955. Over the years, the bank has grown from a local entity to a national presence, particularly with its online offerings, such as CDs and high-yield savings accounts available to consumers nationwide. Primarily serving Michigan residents with a broader array of products, FNBA has consistently expanded its services while retaining its family-owned essence.

With over $2.6 billion in assets, the bank’s reputation for stability and its commitment to customer service and innovative banking solutions positions it well. Its Michigan-focused brick-and-mortar presence and strong online service suite set FNBA apart in the banking sector.

Pros

pros iconCompetitive yields and a wide range of terms

pros iconThe same APY applies to accounts opened online and in a branch

pros icon$1,000 is the minimum deposit for opening a CD

Cons

cons iconNo specialty CDs, such as no-penalty or bump-up CDs

cons iconLong-term CDs have much greater early withdrawal penalties.

cons iconCustomer service isn’t available on weekends

  • $1K Min. deposit
  • 5.15% 12-Month APY
  • 4.65% 36-Month APY
  • 4.35% 72-Month APY

Top CD Rates 2024

5.10%

1-Year APY

4.00%

3-Year APY

3.90%

5-Year APY

No minimum

Minimum Deposit

$0

Minimum Balance

None

Monthly fee

Yes

Daily Compounded Interest

Yes

Early withdrawal penalty

Pros & Cons

drop-down-btn
  • con-icon No minimum deposit requirement
  • con-icon Competitive interest rates
  • con-icon Flexible terms
  • con-icon Low APYs on some term lengths
  • con-icon Early withdrawal penalties

Account types

drop-down-btn
  • 6-Month APY 4.25%
  • 9-Month APY 4.25%
  • 1-Year APY 5.10%
  • 18-Month APY 4.45%
  • 2-Year APY 4.00%
  • 30-Month APY 4.10%
  • 3-Year APY 4.00%
  • 4-Year APY 3.95%
  • 5-Year APY 3.90%

4.70%

12-Month APY

3.75%

3-Year APY

3.75%

5-Year APY

$3K

Minimum Deposit

$0

Minimum Balance

None

Monthly fee

Yes

Daily Compounded Interest

Yes

Early withdrawal penalty

Pros & Cons

drop-down-btn
  • con-icon Daily compounding interest
  • con-icon Many term options
  • con-icon Longer terms earn higher APYs
  • con-icon $2,500 minimum deposit
  • con-icon Automatic renewal upon maturity

Account types

drop-down-btn
  • 3-Month APY 2.00%
  • 6-Month APY 4.25%
  • 9-Month APY 4.25%
  • 12-Month APY 4.70%
  • 18-Month APY 4.40%
  • 24-Month APY 4.00%
  • 30-Month APY 3.75%
  • 3-Year APY 3.75%
  • 4-Year APY 3.75%
  • 5-Year APY 3.75%
  • 7-Year APY 3.75%
  • 10-Year APY 3.75%

4.80%

12-Month APY

4.15%

36-Month APY

4.00%

60-Month APY

No minimum

Minimum Deposit

$0

Minimum Balance

None

Monthly fee

Yes

Daily Compounded Interest

Yes

Early withdrawal penalty

Pros & Cons

drop-down-btn
  • con-icon Variety of CD terms
  • con-icon Competitive rates
  • con-icon No-Penalty and Bump-Up CDs each only have one term
  • con-icon No minimum deposit
  • con-icon No terms over 5 years

Account types

drop-down-btn
  • 3-Month APY 0.25%
  • 6-Month APY 5.15%
  • 9-Month APY 4.90%
  • 12-Month APY 4.80%
  • 18-Month APY 4.50%
  • 24-Month APY 4.20%
  • 36-Month APY 4.15%
  • 48-Month APY 4.00%
  • 60-Month APY 4.00%
  • No-Penalty CD 11 Months 4.50%

4.50%

1-Year APY

4.40%

3-Year APY

4.30%

5-Year APY

$500

Minimum Deposit

$0

Minimum Balance

None

Monthly fee

Yes

Daily Compounded Interest

Yes

Early withdrawal penalty

Pros & Cons

drop-down-btn
  • con-icon No monthly fees
  • con-icon Competitive rates on savings account and CDs
  • con-icon Extended phone customer service
  • con-icon No branch access
  • con-icon No checking account
  • con-icon Excess withdrawal fees

Account types

drop-down-btn
  • 6-Month APY 5.05%
  • 1-Year APY 4.50%
  • 2-Year APY 4.50%
  • 3-Year APY 4.40%
  • 5-Year APY 4.30%

4.95%

12-Month APY

4.00%

36-Month APY

4.00%

60-Month APY

$3K

Minimum Deposit

$0

Minimum Balance

None

Monthly fee

Not available

Daily Compounded Interest

Yes

Early withdrawal penalty

Pros & Cons

drop-down-btn
  • con-icon Competitive rates on CDs
  • con-icon Various types of accounts for short term savings
  • con-icon No monthly fees
  • con-icon No physical locations
  • con-icon Limited customer support phone hours

Account types

drop-down-btn
  • 6-Month APY 4.80%
  • 9-Month APY 4.85%
  • 11-Month APY 4.90%
  • 12-Month APY 4.95%
  • 13-Month APY 4.90%
  • 15-Month APY 4.80%
  • 18-Month APY 4.75%
  • 24-Month APY 4.50%
  • 30-Month APY 4.00%
  • 36-Month APY 4.00%
  • 60-Month APY 4.00%

5.15%

1-Year APY

4.55%

36-Month APY

4.45%

60-Month APY

$10K

Minimum Deposit

$0.01

Minimum Balance

None

Monthly fee

Yes

Daily Compounded Interest

Yes

Early withdrawal penalty

Pros & Cons

drop-down-btn
  • con-icon Accounts with highly competitive rates
  • con-icon No monthly fees
  • con-icon Extended phone customer service hours
  • con-icon High minimum deposit requirements
  • con-icon Excess withdrawal fees
  • con-icon The mobile app has limited capabilities and low customer ratings

Account types

drop-down-btn
  • 3-Month APY 5.25%
  • 6-Month APY 5.30%
  • 1-Year APY 5.15%
  • 18-Month APY 4.90%
  • 24-Month APY 4.70%
  • 36-Month APY 4.55%
  • 48-Month APY 4.45%
  • 60-Month APY 4.45%

Certificates of Deposits (CDs) are straightforward when it comes to investing your savings. They operate like enhanced savings accounts, offering a fixed Annual Percentage Yield (APY) for a specific term length. One notable drawback to CDs is the limited liquidity associated with them.

Typically, withdrawing from them before the term ends results in a penalty, losing some or all of the accrued interest. While CDs are great choices for many, understanding alternative investments like high-yield savings can be beneficial when planning your finances. Let’s explore and compare the best CDs against other popular financial savings tools and find the best investments for your money with minimal risk.

What Is a CD Rate?

A CD Rate is the specific interest rate that financial institutions provide for a CD account. This rate is what really distinguishes it from regular savings accounts, as they are normally much higher. CDs offer multiple advantages, as they generally have higher interest rates. Still, they also stay the same for the set duration chosen, making them more predictable - even if interest rates in the overall economy fall.

While the CD rate, also known as the Annual Percentage Yield (APY), is an important factor, it’s not the only one to consider when opening an account. High interest rates are tempting, but you should consider things like the minimum deposit requirements, the frequency of interest compounding, the efficiency and reliability of customer service, and the user experience of the financial institution, both online and in-person.

While getting the best CD rate is important for optimal returns, the holistic banking experience and other associated factors should not be overlooked. The balance between the maximum returns and convenience - as everything has its cost.

Which CD Term Should I Choose

Selecting the right CD term is challenging because there are so many types of CDs and types of CD accounts. The biggest thing is understanding your financial goals and objectives while gauging the current interest rate environment. Here are a few steps to help you out:

  1. Determine the Time Period: Identify when you’ll need the money. Whether for a new care purchase in 3 months or a dream home in 5 years, your time horizon directly impacts what kind of CD you should buy.
  2. Evaluate your financial goals: Once you have a timeframe, understand the potential earnings. Analyze the factors like the CD’s term, its APY, and the minimum deposit required to gauge how much you’ll earn over time. To make proper decisions with your savings, you need to understand what you are saving for.
  3. Consider current interest rate trends: CD rates are dynamic, so it is important to understand when they are relatively high or low. If you think CD rates are headed higher, leaning towards shorter terms or lock-in periods might make sense. If rates are moving lower quickly like during a recession, a longer term is a better option to lock in the more favorable rate.
  4. Assess liquidity needs: Short-term financial needs can impede your ability to lock in for longer terms. If there’s even a slight possibility you might need some of the funds you’re investing in CDs, look at parking that portion into shorter terms. No-penalty CDs, which permit withdrawals without penalties, might also be worth exploring (although they tend to offer lower rates).
  5. Compare APY across terms: There’s a common misconception that a longer term always equates to higher rates. That’s not always the case, so cross-reference the APYs you’re being offered, as sometimes shorter terms can offer better rates.
  6. Factor in renewal policies: Read the fine print. Some CDs have an automatic renewal feature. While convenient in some cases, ensure you are on top of any renewal dates, as you can get locked into a term that doesn’t align with your financial plan.

How Much Money Should I Keep In CDs?

Determining how much money to keep in Certificates of Deposit (CDs) depends on several personal financial factors. Here are key considerations to help you decide the right amount:

  • Emergency Fund: Ensure you have an adequate emergency fund in a more liquid account before investing in CDs. A common guideline is making 3-6 months' worth of living expenses readily accessible.
  • Financial Goals: Align your investment in CDs with your financial goals. CDs can be a good option if you have short-term goals (like buying a car in a few years). For long-term goals (like retirement), consider more growth-oriented investments.
  • Risk Tolerance: CDs are low-risk investments. If your risk tolerance is low and you prefer guaranteed returns, you might allocate more to CDs. However, remember that low risk often means lower returns than other investments like stocks or mutual funds.
  • Diversification: It's important not to put all your savings into CDs. A well-diversified portfolio includes various asset types, including stocks, bonds, and cash or cash equivalents like CDs.
  • Interest Rates Environment: In a low-interest-rate environment, the returns on CDs might be modest. Conversely, if rates are high or expected to fall, locking in a good rate with a CD can be beneficial.
  • Inflation: Consider the impact of inflation on your CD investments. If inflation rates exceed your CD's interest rate, your investment might lose purchasing power over time.
  • Liquidity Needs: Assess your need for liquidity. Money locked in a CD isn't easily accessible without incurring penalties. Ensure you have enough liquid assets for unexpected expenses.
  • Age and Investment Horizon: Your age and the time horizon for your financial goals can influence how much to invest in CDs. Younger investors might focus more on growth, while those closer to retirement might prefer the stability of CDs.
  • Income Requirements: If you rely on your investments for income, consider how much you need to generate from your portfolio. CDs can provide a predictable income stream, but typically at lower rates.
  • Current and Future Expenses: Factor in any large expenses you anticipate soon. Money needed for these should not be tied up in CDs.

Recommendations

Scenario:

  • Total Savings: $50,000
  • Monthly Expenses: $3,000

Allocation Based on the Scenario:

  1. Emergency Fund:
    • Aim for 3-6 months of living expenses in a liquid account.
    • For monthly expenses of $3,000, this would be $9,000 to $18,000.
  2. CD Investment:
    • After setting aside $18,000 for an emergency fund, you have $32,000 left.
    • If you want to keep 30% of your remaining savings in low-risk investments like CDs, that would be 30% of $32,000, equaling $9,600.
  3. Diversification:
    • With $9,600 in CDs, you still have $22,400 to invest in other assets like stocks, bonds, or retirement accounts for diversification.
  4. Short-Term Goals:
    • If you have a goal within the next 2-3 years (e.g., a down payment for a car costing $10,000), consider putting this amount in a short-term CD or a high-yield savings account for safekeeping.
  5. Long-Term Goals:
    • Allocate the remaining balance towards long-term goals like retirement or a child’s education fund, which could be in higher-risk/higher-return investments.

Best Rates for April 2024

Finding the best CD rates for your desired term is important, and APY is one of the most important factors. However, we noted above that there are many choices when deciding what is best for you and your unique situation. For example, banks and credit unions may offer various perks for investing with their CDs, like more accommodating minimum deposit requirements or better customer support.

Sallie Mae

Sallie Mae Bank is a good option for consumers looking for an online bank with competitive interest rates on CDs. The bank’s CDs offer a good way to grow your savings over time, and the FDIC insurance provides peace of mind.

4.95%

12-Month APY

4.00%

36-Month APY

4.00%

60-Month APY

$3K

Minimum Deposit

$0

Minimum Balance

None

Monthly fee

Not available

Daily Compounded Interest

Yes

Early withdrawal penalty

Pros & Cons

drop-down-btn
  • con-icon Competitive rates on CDs
  • con-icon Various types of accounts for short term savings
  • con-icon No monthly fees
  • con-icon No physical locations
  • con-icon Limited customer support phone hours

Account types

drop-down-btn
  • 6-Month APY 4.80%
  • 9-Month APY 4.85%
  • 11-Month APY 4.90%
  • 12-Month APY 4.95%
  • 13-Month APY 4.90%
  • 15-Month APY 4.80%
  • 18-Month APY 4.75%
  • 24-Month APY 4.50%
  • 30-Month APY 4.00%
  • 36-Month APY 4.00%
  • 60-Month APY 4.00%

Popular Direct

Popular Direct is best for anyone looking for an online savings account and CDs that pay top-notch yields. Popular Direct offers a variety of CDs with terms ranging from three months to five years. The minimum deposit to open a CD is $10,000. The highest APY for a CD is 5.35% for a 6 or 12-month CD.

5.15%

1-Year APY

4.55%

36-Month APY

4.45%

60-Month APY

$10K

Minimum Deposit

$0.01

Minimum Balance

None

Monthly fee

Yes

Daily Compounded Interest

Yes

Early withdrawal penalty

Pros & Cons

drop-down-btn
  • con-icon Accounts with highly competitive rates
  • con-icon No monthly fees
  • con-icon Extended phone customer service hours
  • con-icon High minimum deposit requirements
  • con-icon Excess withdrawal fees
  • con-icon The mobile app has limited capabilities and low customer ratings

Account types

drop-down-btn
  • 3-Month APY 5.25%
  • 6-Month APY 5.30%
  • 1-Year APY 5.15%
  • 18-Month APY 4.90%
  • 24-Month APY 4.70%
  • 36-Month APY 4.55%
  • 48-Month APY 4.45%
  • 60-Month APY 4.45%

Several are in the same range, so do your due diligence and find what works for you. 

CDs: Pros & Cons

Some of the pros and cons to be aware of when locking your money into a CD are:

Pros

Cons

Guaranteed Return: Your interest rate remains fixed, locking in your return. Limited Liquidity: Accessing funds before maturity might lead to penalties.
Safety: CDs are FDIC-insured up to $250,000. Inflation Risk: If inflation is higher than your APY, your purchasing power will diminish.
Flexibility: A range of terms from a few months to several years. Opportunity Cost: Money locked in a CD might miss out on higher returns elsewhere.
Low or No Fees: Many CDs come with minimal maintenance costs. Variable Rates: Some CDs don't offer fixed rates, leading to fluctuating returns.

How Are CD Rates Determined?

Determining CD rates is complex and involves macro and micro factors. The rate you see isn’t just a random figure but a result of an evaluation of these factors. Some of the primary determinants include:

  1. Federal Reserve Rates (Fed rates):
    The Fed plays an important role in influencing CD rates. Banks usually adjust their CD rates in response whenever the Fed moves its overnight banking rate - for instance, hiking it higher to combat inflation. Thus, a rise or fall in the Fed rate often directly translates to rises and falls in CD rates.
  2. CD Term Length:
    The duration for which you commit your money impacts the rate you receive. Longer-term CDs usually offer higher rates because you’re locking in your money for longer, allowing banks to utilize those funds for longer. Conversely, shorter-term CDs generally have lower rates. It’s not always the case, so double-check before purchasing.
  3. Deposit Amount:
    The more you deposit, the more the financial institution benefits. Higher deposit amounts then can sometimes fetch better rates. Some institutions offer tiered rates, where larger deposits get a higher APY.
  4. Competition Among Financial Institutions:
    Banks and credit unions always want new customers. They closely monitor what each other offers and can adjust their rates accordingly. A bank may offer higher rates to lure customers if it wants to increase deposits.
  5. Inflation Expectations and Predictions:
    Inflation diminishes your purchasing power over time. If banks anticipate higher inflation, they may increase CD rates to get ahead of their counterparts. This makes CDs more appealing, so customers feel that they’re at least maintaining, if not growing, their money’s value.
  6. Overall Economic Health:
    The general economic situation of a country or region affects its CD rates. In an expansionary economy, consumers are more likely to spend than save, which may lead banks to increase CD rates to entice them to save.
  7. Bank’s Strategic Objectives:
    Sometimes, a bank will desire to boost its deposits or manage its liquidity higher or lower, affecting its CD rate offer decision.

The CD rates you come across reflect these intertwined factors, and understanding them will help you be a more informed investor.

Are CDs Safe?

CDs are extremely safe. In the U.S., the Federal Deposit Insurance Corporation (FDIC) also safeguards the majority of CDs. Each depositor’s funds in a bank are insured up to $250,000 - including your purchases of CD investments. Even if the bank where you have your funds invested goes bankrupt, your money (up to the FDIC-insured limit) will remain shielded from any adverse effects. In addition to the insurance, CDs promise fixed interest rates - offering more predictability and insulating from market volatility.

CD Fees

There are some associated fees and fee structures when purchasing CDs. While they might seem negligible and unimportant when you first purchase them, watch out for any early withdrawal fees and terms. Should you find yourself in a position where you urgently need access to your deposited funds before the maturity date, banks can and often levy a penalty for taking your money out. The penalty can be large enough to significantly reduce or even negate your accrued interest and, in some cases, claw back some principal.

Another thing to look for is any associated maintenance fees, like annual or monthly. Some banks may charge you if you are under a certain balance or have annual fees associated with the type of account. Always do your due diligence and read the fine print, as any costs associated will affect your true return on investment.

Alternatives to CDs

While CDs are sought-after by many looking for consistent, risk-free returns, it’s worth looking at alternatives that align better with your financial goals. A few options are below.

IRA vs. CD

  IRA CDs
Common Term Lengths None 3 months to 5 years
FDIC-Insured? No Yes
Fees for Early Withdrawal? Yes Yes

IRAs are a way to save for retirement - they are Individual Retirement Accounts. Unlike CDs, IRAs don’t tie your money for a fixed term, as you invest in a multitude of options inside of the IRA itself, allowing your money to grow potentially more for a longer time. CDs have a fixed return, which is more appealing for some investors.

Money Market Accounts vs. CDs

 

Money Market Accounts

CDs
Common Term Lengths None 3 months to 5 years
FDIC-Insured? Yes Yes
Fees for Early Withdrawal?

Typically No

Yes

Money market accounts are a step up from a checking and savings account. They tend to offer higher interest rates, and even some offer check-writing capabilities without a restrictive lock-up period. CDs will likely offer higher rates, though, for those willing to keep money invested for a longer term.

Savings Accounts vs. CDs

 

Saving accounts

CDs
Common Term Lengths None 3 months to 5 years
FDIC-Insured? Yes Yes
Fees for Early Withdrawal?

No

Yes

Savings accounts offer liquidity and ease of access but often have lower interest rates. They are often more suitable for funds that you need within a short period or even to cover day-to-day expenses. CDs will outperform in terms of returns compared to savings accounts, but you forfeit the liquidity aspect.

Bond Funds vs. CDs

 

Bond Funds

CDs
Common Term Lengths Varies 3 months to 5 years
FDIC-Insured? No Yes
Fees for Early Withdrawal?

No, but possible commission

Yes

Bond funds invest in a pool of individual bonds, and then you purchase a share of the mutual fund so you can benefit from the growth. They offer diversification and potentially better returns than CDs but come with market risks and a management fee. CDs do not have the market fluctuations associated with bond funds, as well as lower fees, in general.

Peer-to-Peer Lending vs. CDs

 

Peer-to-Peer Lending

CDs
Common Term Lengths

Varies, often 3-5 years

3 months to 5 years
FDIC-Insured? No Yes
Fees for Early Withdrawal?

Can’t usually withdraw. Selling notes may incur fees

Yes

Peer-to-peer lending is a relatively new financial instrument, allowing users to earn interest by lending to individual borrowers or small businesses online. They can offer higher returns than CDs, but come with increased risks - including no FDIC insurance.

These alternatives show a few ways you can approach saving and investing. While CDs offer a stable investment, ensure you understand the benefits and drawbacks before locking in your funds.

Conclusion

Certificates of Deposit (CDs) offer opportunities to gain interest in your investments as close to risk-free as possible. They are safe and predictable returns, although understanding the nuances between different financial institutions is important. In addition, watch out for any costs associated with early withdrawal when making a financial decision. As always, contact a financial expert if you have further questions or need help with managing your finances.