Ally Bank Savings & CD Rates Confuse Me

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Ally BankEvery week I get an email from Ally Bank informing me of how the rates will be changing (Ally Bank rates are adjusted on Fridays) and their rate structure has been confusing me as long as I’ve been getting these emails.

Ally Bank’s Savings & CD Rates

Rates are subject to change, here are the current Ally Bank CD rates.

Why Is This Weird?

Typically, your online savings account interest rate should be the lowest of the three (CD rates should be higher given restrictions). Next would be the 9 month no-penalty CD rate followed by the regular CD rate. You should get a lower interest rate on the account with the most flexibility. Since you withdraw money from a savings account at any time, you should be paid the least amount of interest in that account. Since you can withdraw your money from a no-penalty CD at any time without penalty, it should have a lower interest rate than a regular CD, where you would have to pay a penalty to access your funds.

Ally Bank has had this interest rate irregularity for a while now but recently it’s come back in line.

So What?

If you have money in Ally Bank’s online savings account, you should open a 9 month no-penalty CD immediately and transfer all your funds into that CD. Should the online savings account interest rate ever increase past the no-penalty CD, then you could liquidate the no-penalty CD without penalty. If you need the money, you can liquidate the no-penalty CD.

In fact, the best strategy would be to open up multiple no-penalty CDs so that if you do need the cash you don’t have to close out one big CD. Ally Bank does not have a minimum for CDs. For example, if you have $5,000 to save and you aren’t sure if you need the money. Open up five $1,000 no-penalty CDs. If you need $500, you can just close one of the CDs. If you opened up one single $5,000 CD, then you’d have to liquidate the whole to get access to just $500.

Am I missing something?

{ 13 comments, please add your thoughts now! }

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13 Responses to “Ally Bank Savings & CD Rates Confuse Me”

  1. Rae says:

    My mostly uneducated guess would be that they’re currently trying to seduce new customers with the wonky rate schedule, but will later readjust it to fall in line with what you described as “normal.”

    I know on occasion ING Direct will set up their CD rates so that shorter-term or mid-term CDs have higher rates than the long-term ones. I’ve always assumed they do this to target people who aren’t currently using CDs to get started, and then hopefully continue to use them (after the rates have been readjusted). For instance, right now, a 6-month CD is 1.65% which is higher than everything but 48-month+

    ING sticks to the CDs for the most part there, but same concept for Ally – get customers in with good rates and keep them after the rates normalize.

  2. Min says:

    Even better, buy $2500, $1250, $625, $312.5, $312.5 CDs. That way, you get finer granularity on how much you can take out.

    You can make the granularity even finer by increasing the total number of CDs you buy. And the math simpler if you buy CDs that sum up to $100*((2^x)-1) where x is any positive integer.

    Anyway, I’ve seen this kind of trend at other places and am also curious to how the banks are coming to these decisions. How do these make financial sense?

    • Jim says:

      Ultimately the cost will be in the time it takes to open each of these accounts, which is only five or ten minutes each once you already have an account there.

  3. Neil says:

    I’ve been having the same issue with ING Direct for several months. Their GICs for less than 18 months have had lower interest rates than their savings accounts since the prime rate bottomed out at 0. Maybe before…I only became secure enough to consider locking in about when interest rates bottomed.

    The only reason long term deposits should ever be lower than a flexible savings account is if the bank’s risk managers think that interest rates will drop substantially enough during the deposit period to wipe out the security advantage they get from the lock-in. Currently that’s impossible, so I really don’t get it.

  4. freeby50 says:

    It doesn’t make sense to me from a financial picture.

    I’m guessing there is some marketing reason for it. They’re probably trying to push people into one kind of account or another for some reason thats not obvious to us.

  5. It has to be marketing. I’ve noticed this over the last year or so at MANY big financial institutions as well as smaller community banks and credit unions.

    The risk/reward structure just doesn’t match up with common sense.

  6. Ken says:

    Be careful about opening up too many CDs if you use funds from the savings account. Each transfer from the savings to the CD counts against your 6-per-month withdrawal limit.

  7. CuriousAG says:

    Did you also notice, Ally offers 1.65% APY on 6-month CD while 1.55% APY on 9-month CD, this is the weirdest of all I have ever seen. 😉

  8. Cynthia C says:

    Why open multiple CDs when you can just withdraw the amount you desire from one big CD? There probably are no limitations on withdrawls and we know there is no penalty, so why complicate your life by creating all that paperwork to keep track of?

    • Jim says:

      When you withdraw money from a CD, you have to close the entire CD. Since the rate offered on a CD can change, you could be closing one large 2% CD only to reinvest the difference in a 1% CD.

      There’s very little paperwork, it’s all electronically managed, so I don’t see a lot of hassle there.

    • Mari says:

      Totally agree with you! Why not simplify?

  9. Kate says:

    The reason banks do this is they want to match deposits with their funding needs for loans. Right now, they clearly need short-term funds and don’t need to have 9 month money.

  10. Smart Banker says:

    The rates for CDs are fixed while the savings account rates move. Most people who invest in CDs do not have the time keep track of the interest rates, and might actually be earing lower rates over the term compared to a savings.

    With the fed rate at 0%, the only way savings account rates can go is up. If you follow the rates closely, then you can get on a CD and liquidate to a savings when that happens.

    Multiple CDs are REQUIRED if you want to liquidate part of the funds – cannot withdraw part of the money as somebody pointed out.

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