Pros & Cons of Bank CDs

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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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