Certificates of deposit (CDs) are a popular investment option for those looking to earn a guaranteed rate of return. Two types of CDs that often come up in discussions are the 1-year CD and the no penalty CD. Both of these CDs have their advantages and disadvantages, and it can be difficult to determine which one is right for you.
In this article, we will compare the rates, minimum deposit requirements, and provide a general explanation of these two types of CDs.
Compare No Penalty vs. 1-Year CD Rates
One-year CDs typically offer higher rates than no-penalty CDs because they require the investor to commit their funds for a fixed period of time. This is a longer commitment than a no-penalty CD, which can be withdrawn at any time without incurring a penalty.
When an investor commits their funds for a longer period, they are taking on more risk and sacrificing liquidity. In return, banks and financial institutions are willing to offer a higher interest rate to compensate for the increased risk and lack of flexibility.
In contrast, no-penalty CDs provide greater flexibility and liquidity since they allow investors to withdraw their funds without incurring any penalty. This makes them less risky for investors, and consequently, the banks and financial institutions offering these CDs offer a lower interest rate to compensate for the lower risk.
Unfortunately, few banks are offering no-penalty CDs. However, the interests rates are quite high and the difference in rates compared to 1 year CD is minor, in most cases.
Financial Institution | No Penalty CD | 1-Year APY | Min Deposit |
|---|---|---|---|
4.50% (11-month)) | 5.30% | $0 | |
4.90% (11-month) | 4.65% (13-month) | $1,000 | |
4.55% (11-month) | 5.00% | $0 | |
4.35% (13-month) | 5.20% | $500 | |
4.25% – 4.75% (12-month) | 4.30% | $500 | |
N/A | 5.00% | $0 | |
N/A | 5.20% | $2,500 | |
N/A | 5.25% | $1,000 | |
N/A | 5.40% | $2,500 | |
N/A | 5.45% | $1,000 | |
N/A | 5.75% | $1,000 | |
N/A | 3.00% | $1,000 | |
N/A | 4.25% | $0 |
What Is The Early Withdrawal Fees For a 1-Year CD?
When you withdraw funds from a CD before its maturity date, the financial institution may charge you an early withdrawal fee. This fee is a penalty imposed by the bank or credit union for accessing your funds before the agreed-upon term.
Banking and credit unions differ significantly in the amount of early withdrawal fees they charge. For example, for a 1-year CD, the State Bank of Texas imposes the lowest penalty of 30 days of interest, while Ally Bank and Consumers credit unions charge a slightly higher penalty of 60 days of interest.
Conversely, financial institutions like American Express, Discover Bank, Synchrony Bank, Marcus, Bank of America (with a penalty of 6 months/180 days of interest), and Lending Club impose much higher penalties if you withdraw your funds, ranging from 100% of interest earned to 270 days of interest.
It's important to keep in mind that the early withdrawal penalty typically won't exceed the interest earned on the CD. For instance, if the penalty is calculated as 365 days of interest but you withdraw your funds after 200 days, the penalty will be limited to 200 days of interest. This means that you'll still earn some interest, but your overall earnings may be reduced due to the early withdrawal penalty.
Financial Institution | 1-Year CD Early Withdrawal Penalty |
|---|---|
90 days of interest
| |
6 months of interest | |
60 days of interest
| |
180 days interest
| |
90 days of interest | |
3 months interest
| |
6 months interest
| |
365 days / 30% of dividends (The lower) | |
90 days of interest | |
Fees, based on the amount | |
Fees, based on the amount | |
180 days of interest
| |
270 days interest
|
No Penalty CD vs 1 Year CD: Which One Should I Choose?
When choosing a no penalty CD over a 1-year CD, it can make sense depending on your financial goals and circumstances.
A no penalty CD typically allows you to withdraw your funds before the maturity date without incurring an early withdrawal penalty, whereas a 1-year CD typically imposes a penalty for early withdrawals. If you think there's a possibility that you may need to access your funds before the CD matures, a no penalty CD may be a better option.
On the other hand, if you're confident that you won't need to touch your funds for the duration of the 1-year CD term, you may be able to earn a higher interest rate with a 1-year CD. Typically, the longer the term of the CD, the higher the interest rate.
It's important to also consider the current interest rate environment and the rates being offered for both types of CDs before making a decision. You may want to compare the rates and terms of different CDs from different banks or credit unions to find the one that best fits your financial goals and needs.
