How to Compare Certificate of Deposit Rates
Certificates of deposit, known as CDs for short, provide bank customers with a higher rate of interest in exchange for a loss of liquidity. CDs offer a fixed interest rate over a set term during which the customer cannot withdraw the money without paying a significant penalty. When comparing CDs, you should look at more than just the interest rates because the term, call features and the way the interest is paid can affect your return as well.
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Instructions
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Compare the annual percentage yields (APY) of the CDs. The APY takes into consideration interest compounding so you can make a better comparison than if you were simply comparing annual percentage rates (APRs). You can call your local banks or use online CD rate comparison websites (see Resources).
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Contrast the terms of the CDs. CDs with longer terms offer higher interest rates. However, you lose access to your money for the duration of the CD.
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Check each CD for call options. A call option allows the bank to force you to cash in your CD after a certain period of time if it no longer likes the interest rate. For example, a five-year CD may be callable after only one year. If interest rates fall, the bank will likely force you to cash it in before the maturity date. However, call options only benefit the bank. You cannot cash in a callable CD early.
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Compare how the bank pays the interest on the CD. Some CDs add the interest to the CD, which benefits people who do not need the money and would prefer to have the money earning interest. Other CDs pay the interest to the account holder over the term of the loan, which account holders looking for a fixed income investment prefer.
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Find out the early withdrawal penalties for each CD. In general, the longer the term, the larger the penalty. However, the penalties can differ between financial institutions.
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References
Resources
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