When it comes to personal finance products, there are some specialized options tailored to individual needs that are exclusive to certain financial institutions. However, certificates of deposit (CDs) are not among them. CDs can be purchased at various financial product outlets, but it’s essential to grasp the key distinctions.
What Is a Certificate of Deposit
A certificate of deposit (CD) is a financial tool that locks your funds for a specific period in exchange for a higher interest rate compared to standard savings or checking accounts. During the CD term, which can range from a few months to over a decade, the account earns interest, either fixed or variable. Upon maturity, you receive your initial investment plus interest, allowing you to withdraw the cash or reinvest in another CD.
Where to Buy Certificates of Deposit
Certificates of deposit are widely accessible through both online and traditional banking and financial institutions.
Commercial Banks and Credit Unions
Most banks offer various CD options to customers due to their straightforward nature. These banks include brick-and-mortar establishments as well as online-only and traditional bank internet divisions. It’s wise to compare CD terms, interest rates, and penalties across different banks and credit unions to find the best deal.
Opting for a CD from a bank or credit union offers insurance protection from the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). If your financial institution is federally insured under these agencies, your total deposits, including CDs, are insured up to $250,000.
Brokerage Firms and Independent Sales Representatives
Apart from banks and credit unions, CDs can be purchased through brokerage firms or deposit brokers. They may negotiate higher interest rates with banks to offer brokered CDs touted as high-yield options.
Brokered CDs can have extended terms, potentially up to 30 years, but may lack FDIC or NCUA insurance coverage. Hence, it’s crucial to buy brokered CDs only from reputable firms.
What Is a Callable CD
A callable CD allows the issuer to terminate it before maturity, usually in response to significant interest rate drops. In such cases, you should receive your original deposit plus any accrued interest.
How Does Laddering Work With CDs
Laddering involves purchasing CDs with various maturities instead of a single CD, enabling you to manage reinvestment risks and capitalize on rising interest rates.
Are CDs Good Investments
CDs offer a secure way to preserve capital, though they may not yield returns as high as other investments. Combining CD investments with riskier options allows diversification for potential higher returns.
The Bottom Line
Certificates of deposit are widely available, with most banks and credit unions offering them. While brokerage firms provide higher-yield options, they may lack the safety net of FDIC or NCUA insurance.