Certificates of Deposits, more commonly referred to as CDs, are what is known as a time deposit. They are provided by banks and credit unions and function much like a savings account because they are FDIC insured and practically free of risks. CDs differ from savings accounts because they generally offer a higher interest rate.
In exchange, the account holder agrees to keep the money deposited with the bank for a specified period of time, usually three months, six months, or one to five years. The Certificates of Deposits are said to be held to maturity when that time elapses, after which the money can be withdrawn with whatever interest has accrued.
Usually CDs require a minimum deposit. Higher interest rates are sometimes provided for bigger deposits although many financial institutions offer lower rates for CDs that are larger than $100,000, which is considered a Jumbo CD. Account holders who withdraw their deposit before maturity can suffer stiff penalties in the form of months of interest losses.
CDs can also be procured through a deposit broker. Generally, these brokerage firms are able to negotiate slightly higher than average 3 month CD rates in exchange for bringing in a certain amount of deposits to the financial institution that issues the certificates. Brokered CDs are often marketed as being free from prepayment penalties.
This is because the broker purchases the CD in larger denominations then is able to split it up and sell it to several unrelated investors. Should one of these investors decide to cash in their CD before maturity, the broker can venture to resell the CD at times for a profit. FDIC insurance also applies to brokered CDs, however in the event the financial institution fails, these take considerably longer to claim.
Deposit brokers also offer CDs. The benefit of using a brokerage firm is they can often negotiate a higher interest rate for the account holder. They can accomplish this by guaranteeing to draw a minimum number of deposits to the bank or financial institution. These brokered Certificates of Deposit are sometimes owned by a group of investors rather than an individual. Each unrelated investor owns a portion of the Certificate, which means each can qualify for up to $100,000 of FDIC coverage. Generally the standard coverage for single account holders is up to $250,000 per depositor.
While CDs are a safe way to increase earnings from deposits, they generally don’t make much more in interest than an average savings account, but they are easy to set up and manage which makes it a boon to the average account holder who knows little of investment strategies.
Check out the best CD rates at Chartway FCU CD Rates and Charles Schwab Bank CD Rates