CD Penalties

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Do CDs have penalties for early withdrawal?

CD Penalties

While you compare certificate of deposit rates, you must consider the penalties that go along with them. You see, in order to offer a high interest rate, banks and financial institutions expect you to keep your money invested in the certificate of deposit for the entire period you initially agreed to. So if you agree to a 5 year CD with an interest rate of 3%, the bank is only able to give you that 3% because they know they can invest your money on loans for at least 5 years.

If you should decide to take some of your certificate of deposit principal out before the 5-year term ends, then the bank is not going to pay you a 3% return. Instead, they are going to apply a penalty to the funds you take so that your yield is reduced. When you compare certificate of deposit rates, if you look only at the interest rate of the potential certificate of deposit then you are only getting part of the story. Instead, evaluate your potential purchase on both the interest and the penalties as well as your potential ability to leave the money alone.

   

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