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No-Penalty CD (Certificates of Deposit) Rates

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Ally Bank was the first online bank to offer a no-penalty certificate of deposit and now it appears that the idea is catching on. Discover Bank will announce tomorrow that they are making their 12 month CD a no-penalty CD, where you can withdraw your funds should you involuntarily lose your job. All new and renewing account holders will get this benefit (existing account holders won’t, I assume because neither party can change the terms before maturity).

What is a No-Penalty CD? If you read my Certificate of Deposit Zoo post last week, then you’ll know that no-penalty CDs are ones where you can withdraw your deposit before the CD’s maturity date without any interest penalty. Normally a CD will charge you 3-6 months worth of interest to close it early, no-penalty CDs let you close your account.

Comparing No Penalty CD Rates

The tricky thing about no-penalty CD rates is that by virtue of it being no-penalty, it’s effectively a 1 month CD. You can cancel it at anytime without penalty, so you can compare a 10 year no-penalty CD to a 3 month traditional CD. If you have a 10 year no-penalty CD (tell me if you know of one!) at 3% and a 3 month traditional at 1%, you will go with the 10 year every single time because you can close it after one month! That’s why no-penalty CDs are so rare!

No-Penalty CD Rates

At the moment, I only know of two online banks offering no-penalty CDs so I will update this list should more banks start offering them:

If you know of any bank with a no-penalty CD that has a rate that tops these guys, please let me know!

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5 Responses to “No-Penalty CD (Certificates of Deposit) Rates”

  1. Chuck says:

    No penalty is not the same thing as no penalty if you lose your job. :) Just saying…

  2. Anthony says:

    Hmm… maybe this post should be pinned to your “Popular” section!

    In any case, Ally Bank’s 9-month no-penalty CD is still better than their 9-month traditional CD. I will be investing my monies there until a better rate comes along.

    9-month no-penalty CD’s are also a decently good vehicle to build a CD ladder. You can earn better than online savings and can transfer from the no-penalty to a traditional CD when you want to.

  3. Proof says:

    Where is this stated in their CD disclosures for new CD’s about “Discover Bank will announce tomorrow that they are making their 12 month CD a no-penalty CD, where you can withdraw your funds should you involuntarily lose your job”?

  4. Dave M. says:

    I recently changed my CD strategy. Till this week I had been keeping all my cash in my money market accounts because their APYs are so close to the short-term CD rates. But they’ve all dropped below 2% now, and I’ve been trying to figure out a way to get a higher return but still have access to the funds in case of financial emergency (such as being laid off) or a healthy rebound in the MMA/CD rates.

    So, I just opened a 5-year CD at 3.6% APY. I put in all of my cash that I don’t have immediate plans for spending this coming year (which is essentially my emergency fund). If I need to access the money in the CD, the penalty is only six months of simple interest on the withdrawn amount.

    I did some calculations, and found that the only scenario where I don’t come out ahead is if I had to withdraw the entire amount from the CD in the first year.

    If I withdraw the funds at the end of the second year, my effective APY (actual APY less the penalty) is 2.7%, which is still better than any of the current 24-month CD rates, and almost a full percent higher than my current MMA rates.

    So, I’m locking in a high rate (relative to current rates), which protects me from rates continuing to slide. If rates rebound before the 5-year term ends, I can easily pull that money out of the CD and put it elsewhere.


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