Interest in savings can be a good way to earn more passive income. Certificate of Deposit or CDs is one such way that pays you more interest than your regular savings account.
CDs have been in vogue for quite a few years now and are continuously attracting more and more people.
But many people are still unaware of what a certificate of deposit is and how is it beneficial?
To put in simple words, CDs are parking some specific amount of cash in the bank for a specific period.
A certificate of deposit is a saving account. It lets you make a one-time deposit for a time period between six months to five years. The bank pays you interest for this deposit.
After the maturity of your deposit, you can redeem your originally deposited amount along with the interest you have earned. One of the main attractions of CDs is the high rate of interest it offers.
What Are the Advantages And Disadvantages of CD Accounts?
Like two sides of a coin, a certificate of deposit also has two sides. One counts its advantages and the other its disadvantages.
Advantages of a Certificate of Deposit:
- Flexible: The amount of time you wish to deposit your money depends on you. You can either invest in the long term or short term. When your term ends, you have an option to either renew your existing CD or start a new one.
- Better returns: CDs offer a better rate of interest than saving accounts. The reason behind this is that CDs are more valuable.
- Wide selection: Ranging from the time period, rate of interest to availability, CDs offer a wide range of terms the investors can opt for.
- Fixed returns: CDs offer a fixed rate of interest to the investors. Thus, they can forecast the returns they will earn from their investment.
Disadvantages of a certificate of deposit:
- Limited liquidity: One of the major disadvantages of CDs is that you cannot withdraw money before its maturity like saving accounts. This reduces its liquidity. But there is a solution to this known as the CD Ladder. A CD ladder is formed when you invest in more than one CDs that mature at different periods of time.
- Inflation Risk: inflation may overtake the rate of interest of CDs. This will reduce the value of your money if inflation takes over.
Even though CDs have some disadvantages, the advantages are more and should be a major reason considered while investing in CDs.
Top 10 CD Rates
A list of 10 financial institutes has been compiled for those looking to invest in CDs. These 10 financial institutes are offering the best CD rates in 2021.
1. CIT Banks
CIT Bank offers one of the best rates of interest online on CDs. Not only on CDs but it also has high returns on savings and money market accounts.
CIT Banks allows you to renew CDs once they have matured. But you can also start a new one if you want.
The minimum initial deposit required here is off $1,000. Once your CD has matured you can withdraw the entire amount along with the interest earned.
Unlike CIT Banks BBVA is an in-person bank and not an online bank. But BBVA offers a better rate of interest online than at its local branch.
The minimum initial deposit required here is $500. It also provides its customers with a fee-free checking account. This means that you need not pay a fee for your CD account or checking account.
This feature is beneficial because it allows you to make deposits without charging anything in return like bank charges.
3. Live Oak Bank
Live Oak Bank offers very attractive rates for 12 months on CDs. The initial deposit required here is $2500.
You can also invest in APY for six months. You can also find good terms and conditions on savings accounts too.
4. Capital One 360
Capital One 360 is one such online bank that has no specified amount of initial deposit. You can deposit any amount you wish to in CDs for a period ranging between six months to 60 months.
Another attractive offer Capital One 360 offers its customers is a no-fee 360 Checking account. Applying for this account gives you access to over 39,00 ATMs.
5. Synchrony Bank
In comparison to all its competitors, Synchrony Bank has some of the best rates of interest to offer. The minimum initial deposit required here is $2,000.
If you plan to invest in Synchrony Bank, it is advisable to invest for 12 months or more. The reason behind this is that they yield higher returns than short-term investments in CDs.
If you are a member of the Synchrony Bank program, you also get to enjoy other facilities. These facilities include leisure and travel offers.
6. Marcus by Goldman Sachs
With an initial deposit of $500, Marcus by Goldman Sachs has high-yielding certificates of deposit. You can earn a high rate of interest on a 12-month APY.
A special feature of Marcus is that it puts on penalties on its CDs.Even though the APY is not very high, the rate of interest in CDs is as high as its competitors.
7. Ally Bank
Ally Bank is unique in its way. It offers not one but three CD products. Your returns depend on your deposits and your product.The choices offered to its customers are:
- High Yield CD
- Raise Your Rate CD
- No Penalty CD
There’s not much difference in the rate of interest between the three products. One of the most attractive features of Ally Bank is that it offers a 10-day best rate guarantee.
Under this scheme, if the bank raises the rate of interest on CDs in 10 days from your initial deposit, the rate of interest on your CD will automatically increase to the new one.
8. Discover Bank
Discover Bank is the only bank that allows its investors a CD for a period of 10 years. All the other banks offer CDs for a maximum period of 5 years only. The minimum initial deposit for all CDs is $2,500.
Even though it offers a term of 10 years, it is advisable to opt for shorter terms because the rate of interest on CDs can change in long term.
9. Citizens Access
The time period Citizen Access offers on CDs ranges from 1 year to five years. The rate of interest here is similar to all its other competitors. Citizens Access is a good and safe choice for investing in CDs.
The initial deposit should be $5,00 minimum. Here too, it is advisable to opt for a shorter term of maturity because the rate of interest hopefully may rise after a year.
10. KS State Bank
KS State Bank is a regional bank and has interest rates similar to other banks. To invest in a certificate of deposit in KS State Bank you will need a minimum requirement of $500 only.
However, one thing is to be noted here. You cannot open all the CD terms online. You might need to go to your nearest KS State Bank to activate some.
The time period of maturity offered here ranges from six months to seven years.These were some of the best banks where you can invest in a certificate of deposit.
There might be a few questions you have regarding CDs. To clear some of your doubts, scroll down to the FAQs. They have some of the most commonly asked questions about CDs.
Q1. Can You Withdraw Cash From a CD?
Yes, it is possible to withdraw cash from a CD. Some banks offer you a facility to withdraw cash without charging a penalty.
Whereas most of the banks charge a penalty on withdrawal of cash before maturity. This may depend on bank policies.
You have to face a penalty even if you choose to withdraw your money just 5-10 days before its maturity.
Q2. Can You Make Recurring Deposits in CD?
No, you cannot make recurring deposits in CD. A certificate of deposit allows you to make a onetime deposit only.
However, some selected banks may allow you to make a supplement deposit. But this deposit has to be in the form of a second CD.
The reason behind this is that CDs offer a fixed rate of interest for the whole time period. The main reason one invests in a CD is to save themselves from fluctuating bank interest rates.
It is not compulsory to open a second CD but if you want to make another deposit you can open a new one.
Q3. Are CDs Better Than Savings Accounts?
If you are not an avid saver and want to save some money, CDs are the best option for you. There can be three reasons why CDs are better than saving accounts:
- Higher interest rates
- No need for instant access to cash
- Need for an IRA CD over a taxable bank account
However, some banks may offer higher rates of interest on savings and money market accounts. So, you might want to check and compare before investing.
Q4. Are 12-month CDs Better Than Longer CD Terms?
You might want to consider two factors before deciding the time period you want to invest your money in CDs.
- Will the rate of interest increase in a year?
- Will you need instant cash in the short term or after 12 months?
There are high chances of interest rates rising in the short term. Therefore, it is advisable to invest in a short term or 12-month CD.
Also, you might need instant cash in the short term. In such a situation, short term CDs offer more liquidity and flexibility.
Another advantage is that if the rates increase after or within 12 months, you can invest again in CDs and earn a higher rate of interest than before.
Q5. Are Local Bank CDs Better?
Some local banks may offer good rates of interest on CDs but the only restriction here is that they will be available only to the people living nearby.
Its membership might also be restricted to certain people who work for a specific employer. There’s no such restriction with online banks.
Online banks, however, have a wider reach and are available to a wider customer base. Another advantage of online banks is that they have lesser operational charges.
The list given above is a good way to compare online banks and your local banks before investing in a certificate of deposit.
A certificate of deposit is a good and safe way to earn high and fixed interests. You only need to make a onetime deposit and enjoy good returns.
CDs are in vogue because they offer much better and higher rates of interest than saving accounts and money market accounts.While investing in CDs it is preferable to invest for a period of 12 months only.
This is because the rate of interest keeps fluctuating. After a year, if the rates increase and you invest in a fresh CD, your returns will be higher.
Another way to earn more through CDs is by creating a CD ladder. A CD ladder lets you invest in more than one CD, all with different periods of maturity. This maintains liquidity and flexibility in your cash.
You can always choose banks that allow you to deposit small amounts in a certificate of deposit. This way you don’t have to lock away a lot of your cash for a specified period of time.
Also, make sure to compare banks before investing in CDs and find the best offers for yourself.