Advantages And Disadvantages Of Certificate Of Deposits
One of the personal banking products you may have seen is the certificate of deposit or CD. CDs can be a good investment under certain circumstances. However, like any investment, they also have risks. If you want to know more about CDs, how they work, and their risks, continue reading for more information.
What Is the Difference Between CDs and Savings Accounts?
Savings accounts allow you to put away money and earn interest at the same time. You can access and withdraw your money when you need it. Sometimes, you also have to pay a fee. You can often avoid fees with a minimum balance. Most of the time, the interest rates follow market rates. However, high-yield savings accounts offer more interest but have more restrictions.
On the other hand, CDs offer much higher interest rates than a typical savings account, even higher than high-yield accounts. The drawback is your money is locked in for a certain length of time. That means you cannot withdraw your money without penalties. However, you can often choose CDs with different lengths of maturity.
What Are the Benefits of a CD?
The main benefit of a CD is that you have more stability in the interest rates. A fixed-rate CD keeps the same interest rate throughout its length. Fixed rates can be advantageous if you expect the interest rates to drop. However, you can also get variable and adjustable rate CDs that allow you to get the benefit of rising interest rates during your term.
CDs can be a good idea if you are someone who has a hard time saving money because it makes access more difficult. CDs also tend to have fewer costs and fees than many savings accounts. They are also safe and insured like any other bank account.
How Are CDs Risky?
Though it is a benefit for some, the lack of access to money is also a drawback. If you need money for an emergency, then you will pay penalties for early withdrawal. Many banks require a minimum investment. If you get a fixed-rate CD, and the interest rates go up, you could lose out on potential earnings. You may be able to offset this by buying CDs with varying term lengths and reinvesting your earnings as they mature.
Like any investment, what you get out of it is based on various factors. CDs work out well for many people, especially those who can put the money aside. However, some people may be better off with a savings account. If you have any questions about these personal banking products, contact a personal banking service.