Why Invest in a No-Penalty CD?
A no-penalty CD is a fixed-rate certificate of deposit banking product that many banks and credit unions offer. It offers the stability of a traditional CD (which locks in your deposits and offers interest payments over a certain period of time); but unlike a traditional CD, the money is not locked away for the entire term. Many no-penalty CDs allow withdrawals after only six months.
The product is best-suited for borrowers who need to make an exceptional lump-sum investment. It can also be beneficial to those who need to make periodic distributions.
No-penalty CDs tend to sport high interest rates in-lieu of the flexibility. They typically come with low-rates of interest, which don’t compare to the best-rates in the market. But the benefit of early withdrawals is more than worth the lower interest rate.
Because there are a range of no-penalty CDs to choose from, it is important to understand the product before you buy. We’re going to take a closer look at the differences between a no-penalty CD, a traditional CD and an Individual Retirement Account (IRA).
The Best No-Penalty CD Rates
CDs, or Certificate of Deposits, have historically been a pretty stable savings instrument. The basic premise of a CD is that you deposit money with a bank and agree to leave it there for a specified period of time … often between one to five years. During this time, the bank won’t withdraw the money, but they also won’t give you any interest. After the maturity date, they will pay you a specified interest rate. In most instances, if you would like to retrieve money before maturity, you will be charged a penalty.
Now let’s get to our No-Penalty CD subject. A No-Penalty CD, also known as a liquid CD, is just a conventional CD with one crucial difference … it doesn’t have the early withdrawal penalty. This makes this type of CD much more like a classic savings account.
With a No-Penalty CD, you can take out your initial investment and any accrued interest at any time, penalty free. You lose all of the interest if you decide to take the money out of the CD early, but that shouldn’t be an issue since you can’t get that interest unless you do wait until the CD matures.
Conclusion
So there you have it! My aim here was to lay out some of the terms in a conversational way so that you can begin to have intelligent conversations about CDs and start to learn. You won’t be an expert in a week (or even a month) but one of the biggest setbacks in investing is a lack of knowledge. So the more you can learn about CDs the better.
The first thing you should do is put together a small list of CDs that you know and have researched the terms and terms of, and start looking into those. It’s okay to start small since this can be a steep learning curve. Proof is in the pudding though and the best way to learn is to do and put yourself out there in the market to learn and make some mistakes.