A no-penalty CD is a type of Certificate of Deposit that has no fee when you withdraw money before the designated CD term expires. Terms can range anywhere from 6 months to 5 years. With a No-Penalty CD, you can generally can withdraw the full balance any time starting the week after the day you fund a CD.
In this guide we will breakdown everything you need to know about no penalty CDs.
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How Does a No-Penalty CD Work?
A certificate of deposit requires time and a commitment to funding. To maximize the amount of money that you can earn, you will need to leave your funds in an account and not take them out. A typical traditional CD term lasts anywhere from six months to five years. In that time period, you cannot withdraw your funds otherwise there will be fees. If you withdraw the money prior to its maturity date, you will have to pay a minimum of seven days of interest.
Because of the fees of a normal CD, no-penalty CD accounts are very popular, however, there are some disadvantages. Although no-penalty CDs sound like they provide depositors with great perks by avoiding the fee, the trade off is a lower interest rate.
Are CD rates locked in?
Similar to traditional CDs, no-penalty Certificate of Deposits are fixed rate accounts where the rate does not change for a set period of time. In this time, the savers will earn a set rate of interested.
Although the interest rates are locked in with a no-penalty CD like a traditional CD, you can expect to earn less interest on your funds.
Pros of a no-penalty CD
- Flexible Account: Ability to withdraw money from your CD early without paying a penalty fee is good if you are in need of quick cash
- Locked In rate: You will get a fixed interest rate to build your saving, however, due note that this rate will be lower than a traditional APY.
Cons of a no-penalty CD
- Full Withdrawals: You will not be able to make partial withdrawals. If you decide to take out money, you will need to withdraw the full account.
- No Multiple Deposits: Similar to a traditional CD, you are not allowed to make multiple deposits into no penalty CDs.
Is a No-Penalty CD Right for You?
If you are considering a no-penalty CD, it is important to thoroughly review what the CD’s terms are.
Before depositing your funds and locking them away in a traditional or no-penalty CD, you should see if the investment realistically fits your needs. When you read the fine print you should see if you are allowed to withdraw a partial amount and if you are, how many partial withdrawals you would be allowed to make.
When considering a No-Penalty versus traditional CD, you should consider if you are financially stable to store your funds into an account for the lock in period of time. If you are able to store your funds away without touching them, you will be able to earn a much higher interest rate on your funds.
No-Penalty CD Alternatives
No-penalty CDs are a good option if you are looking to save and earn a higher interest rate on your funds without locking your funds in for a long time. If you do not think you will be needing the funds before the term ends, then this option might work for you. However, due note that many no penalty CDs only allow you to withdraw all your money at once.
Another option to consider is a high yield savings account. This might be the better alternative for you if you occasionally tap into your savings. Most high yield accounts offer interest rates that are around the ball park of no-penalty CDs and they also allow you to make up to six free withdrawals each month.
Conclusion
It is important to really investigate the terms of a no-penalty CD versus a traditional CD. You can be saving a lot more money if you have a better idea of your financial needs.
Be sure to know the terms of your account before signing up. Additionally, If you are interested be sure to check out our list of bank bonuses, saving rates and CD rates!
