If you want to maximize returns without increasing your risk, one of the best investment options is the Certificate of Deposit (CD) if you can get the best interest rates.
A CD is a type of federally insured savings account that has a fixed interest rate and fixed date of withdrawal, known as the maturity date.
Unlike stocks or bonds, CDs offer a guaranteed return on investment, making them an attractive option for conservative investors.
However, not all CDs are created equal, and finding the best interest rate can be akin to finding a needle in a haystack.
In this comprehensive guide, we’ll explore where to get the best interest rates on your CD and highlight the financial institutions that guarantee favorable rates to investors.
Factors to Consider Before Choosing Where to Open a CD Account
To start, it’s crucial to understand that the interest rate you receive on a CD depends on several factors.
However, the interest rates are not vulnerable to fluctuations, unlike High Yield Savings Accounts. The rate you lock in when you make the deposit remains the same throughout the term length.
The term length is the period you are required to lock your money. It can range from 3 months to 5 years. The longer the term length, the higher your interest.
This makes CDs a great option if you want to save for a big purchase like a car.
This same advantage makes it not so great to build an emergency fund. You will pay a penalty for withdrawing before the specified period.
The minimum deposit depends on the bank. Most banks have up to $500 minimum deposit except a few like Ally Bank which has no minimum deposit.
Typically, longer-term certificate of deposit offer higher interest rates than shorter-term CDs, but this is not always the case.
Additionally, some banks and credit unions offer “special” rates for new customers or for larger deposits, which can significantly impact the overall return on your investment.
In essence, before creating a credit deposit account, consider the term length, the amount deposited, and the minimum deposit, and set up an emergency fund somewhere.
Also Read: Is it Better to have a Savings Account or a Retirement Account
Looking Beyond Big National Banks for the Best Interest Rates
While traditional banks are well-known and offer a sense of security, they often provide lower interest rates compared to smaller banks, online banks, and credit unions.
These larger banks have extensive overhead costs and do not need to compete as aggressively for depositors’ money.
On the other hand, online banks and credit unions typically have lower operating costs and pass these savings on to their customers in the form of higher interest rates.
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The Appeal of Online Banks
One of the first places to look for competitive CD rates is online banks. Banks like Ally Bank, Marcus by Goldman Sachs, and Capital One 360 often offer some of the highest rates in the market.
These banks operate exclusively online, with no physical branches, which allows them to offer higher interest rates and lower fees.
For example, Ally Bank has consistently been recognized for its high-yield CDs, which offer rates significantly above the national average. The bank also offers an 11-month no penalty on your CD.#
Similarly, Marcus by Goldman Sachs provides no-penalty CDs that allow you to withdraw your balance without a penalty. This feature is rare among traditional CDs.
Most online banks are FDIC-insured, so your money is protected. There’s also zero liability should there be any unauthorized transactions on any of your accounts.
Operating fully online, non-traditional banks do not offer in-person experience. You may opt for other options if such an experience is an absolute experience you seek.
Credit Unions: A Viable Alternative
Another excellent option for finding favorable interest rates are Credit unions.
Credit unions are not-for-profit organizations that return profits to their members in the form of lower loan rates, higher savings rates, and reduced fees.
For instance, consider this finding for February 2024 by Investopedia.
“Right now, the best CD rate across all terms is 5.75% APY, offered by Andrews Federal Credit Union for a 6-month CD with a $1,000 minimum deposit.”
The top CD rates in the above rankings typically pay three to five times as much as the national average—or even more.
To open a CD with a credit union, you need to become a member. The demand may involve living in a certain area, working for a particular employer, or making a small donation to a partner organization.
Once a member, you can access CD rates that often outperform those offered by both big banks and online banks.
Mid-Size and Community Banks
It’s also worth considering mid-size and community banks for CD investments.
These institutions often offer “relationship” rates to customers who have other accounts or services with the bank.
While the base rates may not always be as high as those offered by online banks or credit unions, the relationship rates can be very competitive.
Additionally, investing with community banks can have the added benefit of supporting the local economy.
Comparing CD Rates
When comparing CD rates, it’s important to use resources like Bankrate, NerdWallet, and the Federal Deposit Insurance Corporation (FDIC) website.
These sites provide up-to-date information on CD rates from a wide range of financial institutions, making it easier to compare your options.
Remember, the highest rate isn’t always the best choice. You should also consider the terms and conditions associated with the CD, such as the minimum deposit required and the penalty for early withdrawal.
Considering Economic Environment and Interest Rate Trends
Before locking in a CD, consider the current economic environment and interest rate trends.
In a rising interest rate environment, locking in a long-term CD might not be the best strategy, as you could miss out on higher rates in the future.
In such cases, a ladder strategy, where you invest in certificate of deposit with varying maturity dates, can provide both interest income and flexibility to take advantage of rising rates.
Such a strategy mitigates the risk of locking in lower rates long-term. It gives you a responsive mechanism to shifting economic conditions.
Also Read: What are the Different Types of Reverse Mortgages?
Conclusion
Finding the best interest rate on a CD requires some form of comparison shopping. Online banks and credit unions often offer the most competitive rates, but don’t overlook mid-size and community banks, especially if you qualify for relationship rates.
Make use of our recommended financial websites to compare rates and read the fine print to understand the terms and conditions of your CD.
