Pros & Cons of Bank CDs

by Duncan Jenkins ; Updated July 27, 2017
Bank CDs are higher yielding savings accounts.

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.

Pro: Safe

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.

Pro: Loans

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.

About the Author

Based in Eugene, Ore., Duncan Jenkins has been writing finance-related articles since 2008. His specialties include personal finance advice, mortgage/equity loans and credit management. Jenkins obtained his bachelor's degree in English from Clark University.

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