Best CD Rates
In this article, we’ll take you through the best CD rates available in the market and which bank you can get them from. We’ll also explain what CDs are all about, how you can earn from them and some other details you should know about before investing your hard-earned money
- 1-Year Rate
- Minimum Deposit
BrioDirect
- 0.65%
- $500
Quontic Bank
- 0.65%
- $500
Live Oak Bank
- 0.65%
- $2,500
- APR range
- Fees
- Terms
- Amounth
- Unemployment protection
Bank 1
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 2
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 3
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Table of Contents
What is a Certificate of Deposit (CD)?
A Certificate of Deposit (CD) is a savings product wherein you earn interest from storing away money with an issuing bank over a period of time. It’s comparable to a regular savings account, except that CDs’ interest rates are fixed and slightly higher. The amount you invested is also locked in for a specified term, which can be anywhere from six months to 5 years. And, in some cases, you’re not allowed to withdraw your funds ahead of the set duration without a fee.
Essentially, CDs present a low-risk investment opportunity for investors since they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000.
How CD rates are calculated?
An invested sum in CDs compounds over time. This means that when a CD earns interest rates, it is calculated based on the initial principal and all accumulated interest, or another term for it is interest-on-interest. Compared to bonds, an intrinsically related investment vehicle, CDs may offer you superior returns over time, mostly since a bond’s interest or coupon rate is derived only from the principal.
This is the formula for you to calculate CD rates:
Final Amount = Principal (1+Rate) Term
Using the formula above, your $5,000 investment with a 5% rate would turn into $6,381 after five years. But if you invest the same amount in a bond with an equal rate, it would be $131 short.
CD: $6,381 = $5,000 (1 + 0.05)5
Bond: $6,250 = $5000 + ($5,000 x 0.05 x 5)
CD rates formula helps you to know how much rate you will pay in the long run.
Terms and Risk of CDs
Even though CDs are generally considered a low-risk investment, they still impose certain risks that you should be aware of before you even consider investing in one. Some of those risks include:
Bank Failure. Banks, of course, are also businesses, and because of this, they have what is called operational risk. And what this means is that if a bank, under certain circumstances, goes belly up, you could lose your entire investment, especially if the FDIC or National Credit Union Administration (NCUA) does not insure your deposit. But it’s important to note that there’s also a caveat to that insurance. Since the insured amount with the FDIC and NCUA is only up to $250,000, any amount over that will not be covered.
Inflation is defined as a “general increase in prices and fall in the purchasing value of money.” To wit, a dollar in the future is worth less than a dollar today because everything is much more expensive in the future. So, generally, what investors look for in an investment opportunity is a yield that beats the inflation rate. Let’s say you invested in a CD that offers 2% per year, but the inflation rate is currently at 3%. In this case, you are technically still losing money annually at a rate of 1% in that investment. You need to ensure the rate you’re getting from the CD will more than makeup for the present interest rate.
Opportunity Risk comes from the fact that the funds you choose to invest in a CD are locked in for a period of time. This means that if an investment opportunity comes up, such as when CD rates from other banks increased or bonds now have better yields, you wouldn’t be able to invest in it unless you pay a penalty fee for taking out cash early.
For that reason, you should know when the terms of your CD will be up so you can plan accordingly. Usually, CDs classify into three common ranges:
- Short-term (3 months to 1 year).
- Medium-term (1 to 3 years).
- Long-term (3 to 5 years).
Short-Term CD vs. Long-Term CD
In choosing a CD’s terms, you have to consider, among other things, your present financial condition and investment or savings objectives.
You can ask yourself a fundamental question: Am I comfortable keeping my funds salted away for a long time, or will I need to chip away at my savings to suffice a particular need?
Once you’re clear with your answer, it will be easier for you to decide the right term for your CD or if you even need to invest in CDs at all.
Short-term CD
As mentioned, a short-term CD has a term length of three months to a year, and it can be a great way for you to park your money and earn interest as you prep for something you need to spend on. For example, you already have a set budget for a special occasion like a wedding or even a vacation in a few months. You can at least earn something before that big event by storing your idle cash on a short-term CD as opposed to keeping it stashed away under your pillow.
Long-term CD
On the other hand, long-term CDs are best for saving for something in the future as your money accumulates over time thanks to a CD’s compounding rates. A few examples of what a long-term CD might be useful for are college tuition fees, retirement savings, or even inheritance.
Investment Objectives
You can also base your decision on selecting the term for your CD on your investment objective. Short-term CDs have comparably lower rates than long-term CDs and this is because long-term CD holders are compensated more for keeping funds locked in for a lengthier duration. So, if your time preference is low and you’re looking for an investment that offers steady returns over the long run, then a CD with at least five years would be a good choice.
Short-term CDs have comparably lower rates than long-term CDs and this is because long-term CD holders are compensated more for keeping funds locked in for a lengthier duration.
Pros and Cons of CDs
Now, we’ve already touched on some of the major advantages and disadvantages of CDs. But to provide you a quick recap to easily discern what’s good and bad about the savings product, here is a complete breakdown of a CD’s pros and cons:
| Pros | Cons |
|---|---|
|
Safety - CDs are considered safe because it's backed by FDIC or NCUA insurance for up to $250,000. |
Early Withdrawal Penalty - The money you have in a CD can't be withdrawn before its term ends, but that doesn't mean it's not possible. But to do so, you have to pay from three months of interest to 180 days of interest. |
|
Returns are fixed - Unlike a savings account, CDs offer fixed rates, which make returns predictable and doesn't leave a depositor exposed to sudden rate changes. |
Inflation eats away at returns - CD returns are relatively small compared to other investment products, and when you factor in inflation, it gets further reduced. |
|
Better rate than savings - CDs have higher rates than a regular savings account. |
Taxes eat away the small returns - Another thing that's troublesome for CD holders is that they are taxed on the interest they earn, so it reduces earnings to something virtually inconsequential. |
|
Better long-term returns than bonds - CDs can sometimes offer better returns against bonds with the same rate over time. This is because interest payments with CDs are compounded, whether daily, monthly, or annually. |
|
|
Multiple term lengths available among issuing banks - When choosing a CD term, you have the option to select between a 3-month CD up to a 5-year term CD. |
|
Best 1 year CD rates
Bankrate’s best CD rates for one year are with BrioDirect. The Sterling National Bank sub-brand offers a 0.65% annual percentage yield (APY) as of January 2021, which is the same APY offered by Quontic Bank and Live Oak Bank. And all three of them are FDIC insured.
Most other banks have an average of 0.60% APY, like Amerant Bank, Comenity Direct, Ally Bank, LimeLight Bank, and First Internet Bank of Indiana. Marcus by Goldman Sachs offers 0.55%, while Radius Bank, Sallie Mae Bank, Salem Five Direct, and Discover Bank all have CD rates pegged at 0.50% APY.
What are the average CD rates?
The national average for 12-month CD non-jumbo deposits (deposit amounts of less than $100,000) as of January 4, 2021 is 0.16%. Back in 2019, the same CD was higher at 0.64%. Today’s lower rates were a direct consequence of the Fed cutting its rates due to the coronavirus pandemic.
Several factors influence CD rates. As stated earlier, the term length is one factor wherein long-term CDs have higher rates than short-term ones. Another factor is the current interest rates. If the current rates are low, it also lowers the rate of loans and deposits, which is what happened last year.
Bottom Line
CDs are an excellent way to safely store your money for a certain period and earn higher interest than a savings account. However, the taxes and current inflation (not to mention an early withdrawal penalty fee) eat away at a CD holder’s earnings since CD rates right now are pretty low.
That is why it requires careful consideration before putting money in a CD because many factors effectively reduce its returns. Always weigh your options and your financial status before committing your cash to long-term investment.
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