Bank Certificates of Deposit, commonly known as CDs, are investment tools for average consumers. Most banking and financial institutions offer these programs, which are essentially long-term savings accounts. However, the difference is that there are strict withdrawal limitations on CDs. As a result, consumers are rewarded with more favorable interest rates. However, there are some disadvantages to CDs, as well.
Certificates of Deposit are relatively safe investment programs. If a consumer drops a significant amount of money into the stock market, for example, there is always a risk that that investment could sour. If money is deposited into a CD, the money is guaranteed by the Federal Deposit Insurance Company (FDIC). In addition, even if the interest rate will yield lower returns than a riskier investment, the money will earn at a consistent level.
Most banks have strict withdrawal rules for CDs. In some cases, stiff early withdrawal penalties are imposed. However, if a consumer must access the cash from his CD, he can take a low-interest loan (similar to a 401k loan), and repay the advance over time without too seriously compromising the rate of return on the CD. In addition, by doing business with a bank CD program, many customers are entitled to more favorable bank programs, such as low mortgage rates.
Con: Low Return
There are many different types of CDs. But the consistent thread is this: the annual percentage yield (APY) will absolutely be lower than the projected returns on most other investment strategies, such as stocks and mutual funds. This is the price a consumer must pay for total security on his investment. Savvy investors may choose a CD with a fluctuating interest rate. In times of economic weakness, CD rates tend to be a bit lower. This is a strategy to draw in more consumers. However, a fluctuating interest can also decrease, leading to even lower returns.