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Ally Bank’s No Penalty CD Rate Arbitrage

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Ally BankIf you look at Ally Bank’s current rates, there appears to be a discrepancy in the way they’ve structured their rates. I tweeted about this last week and it appears the difference in rates has persisted through a recent rate drop, making it doubly curious. Let me explain what I mean.

As of today (June 22, 2009), here are the current rates of several of their products:

  • Traditional 9-month CD: 1.75% APY
  • No-Penalty 9-month CD: 2.15% APY
  • Online Savings Account: 2.00% APY

Two things surprise me:

  1. A traditional CD should never have a lower yield than a no-penalty CD of the same maturity. With a no-penalty CD, you have the right to close the CD before the maturity period without penalty. The bank can’t close it. You should be paying, through a discount on the interest rate, for that flexibility. When the no-penalty CD first debuted, its interest rate was a tenth of a percent lower than the traditional CD’s rate.
  2. The no-penalty 9-month CD with a higher yield than the online savings account represents an opportunity. We’re in a period when rates on savings accounts and CDs are dropping. However, should rates ever make a turn and start rising, being locked into a CD might be bad news. However, with a no-penalty CD, I can close at anytime so the risk is minimal! There is no reason why someone should keep their funds in an online savings account when the same exact bank is offering a no-penalty CD option with a higher interest rate.

This morning I transferred all my funds from my Ally Bank online savings account into the 9-month no-penalty CD to get that extra 0.15% APY. If the two accounts weren’t at the same bank, I wouldn’t have done it because the transfer time would’ve cost me interest. However, anytime someone is willing to give me a $2 bill in return for a $1, I take it. :)

Is there something I’m missing?

{ 12 comments, please add your thoughts now! }

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12 Responses to “Ally Bank’s No Penalty CD Rate Arbitrage”

  1. If you were to sub the 2.15% into the normal CD ladder it fits perfectly.  The no penalty CD is only offered at 9 months.  So 6 months is 1.9%, 9 – 2.15%, 12 – 2.3%.  The bank will do this to encourage their new product, even if it means they lose some money in the short term.  We call these products loss leaders.  Other examples are the PS3, which is sold under-priced to get more revenue on games and accessories; and the iPhone which is subsidized up front with lost revenue made up over the course of the 2-year contract.

    It’s a good tactic.  Got our attention didn’t it?

    • Jim says:

      CDs are typically loss leaders anyway, why offer the no-penalty as a loss leader rather than the “classic” 9-month CD? You’d achieve the same goals and it could cost you less.

      • CDs advertised in newspapers are loss leaders, but these rates are in line with what the bank would generate a profit from. Again though, this rate structure would indicate their primary goal is to garner attention and promote a new product.

  2. Julio says:

    With the FDIC forcing Ally to drop rates, I think this is their way of keeping customers happy while still complying. A locked in rate with no penalty for nine months will allow them to keep customers that chase the best rates (like me), giving them the time needed to work things out with the FDIC.

    When they dropped their rate from 2.25%, I jumped ship to Darby (GA only), which is still at 2.25% and has all the same benefits and requirements as Ally, but will consider this CD if the rate drops there.

    Also, I usually link these savings accounts to each other and push the transfers across, minimizing the time lost in interest.

  3. thomas says:

    sad when we are clawing and scratching for .35% and it’s to push 2.15%. $3.50 extra for every $1000 – before taxes. tough times.

  4. Dave says:

    Jim,
    One caveat with the no penalty CD is that you have to withdraw 100% of the funds even if you only need a portion of the money. Not sure if you already knew that. However, I still think it is a great deal and that you should take advantage of it.

  5. Jackson says:

    Yeah I was wondering “what’s the catch” as well. I just opened up two 9-month, no penalty CDs as well.

    (I opened up 2 because just in case I need to break one I don’t have to break the whole amount)

  6. Lucy says:

    If you watch Ally’s CD rate change among the different term CD’s carefully, you can also predict that a rate change (a decrease these days) is coming. One time, the = 12-mo CDs remained the same. I thought that meant all CDs are going to have a rate decrease soon. So I locked a portion of my funds into the higher rate long term CDs. And sure enough, the rate dropped for all CDs within 2 weeks.

    • Lucy says:

      For some reason, the system ate part of my sentence.

      I meant: One time, the 9-mo or shorter CDs all had rate drops while the 12-mo or longer CD rates remained the same.

  7. Michelle says:

    I worked for Ally Bank during the release of the No Penalty CD (which I DEFINITELY purchased). The rate was by design, as mentioned, higher than the classic 9 month in order to draw the attention of individuals who would purchase 9 month CD’s or less. They would be prompted to contact us out of curiousity etc and it allowed us to thoroughly advise them of the new product and its benefits (plus it was in promo stage). This was the same time that our Cust. Service Rep’s became “advocates” meaning they took on more of a financial planner role to work with the customer as well. There’s definitely a lengthy reasoning behind the rates, but it’s all good. I am glad to have my money with them and hope they are successful in redefining the rest of the banking industry in terms of what they have been promoting. (no fees, no penalties -unless Government mandated), sleeping money alerts to help the customer etc)


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