If you’re looking for a safe investment, one of the best products is a CD. However, one of the drawbacks of CDs is that you are tying your funds up for the specified term. This means that if you have a two year CD, if you need to withdraw funds in the first two years, you’ll be hit with an early repayment penalty.
This is typically a number of days of interest, which is often determined by the length of your CD term. Generally, shorter term CDs have a fewer number of days of interest penalty, while longer term CDs have more. Depending on the financial institution, this can be as little as 30 days, but it could be up to 365 days of interest if you have a CD with a term of five years or more.
However, this can be overcome with a no penalty CD. As the name suggests, a no penalty CD means that you will not incur a penalty if you withdraw some or all of your funds before your CD matures.
No Penalty CD Rates
No penalty CD is not so common. However, you can still find it in a couple of banks and financial institutions.
The terms are varied, usually, around 1 year and the rates are slightly below the regular CDs. Here are the rates for no penalty CDs, as of September 2023:
Bank / Financial Institution
4.25% – 4.75%
What Are The Main Drawbacks of a No Penalty CD?
No Penalty CDs are not perfect and there are some potential drawbacks. These include:
- Lower rates: Typically, no penalty CDs don’t offer the same rates as their counterparts. There are some exceptions, but if you are looking for the highest possible rates, a no penalty CD is not likely to be your top pick.
- Some withdrawal restrictions: There is usually a restriction that you cannot make a withdrawal in the first number of days after funding your CD. This should not be much of a problem for most people, but it does mean that you cannot withdraw at any time.
- Limited terms: The other possible drawback of no penalty CDs is that they often have limited terms. Many financial institutions only offer one or two term options on their no penalty CDs, so they are not as flexible as conventional CDs.
How Much Does a No Penalty CD Pay?
Again, this is a question that does not have an easy answer. Typically no penalty CDs have a lower APY compared to traditional CDs, but there can be a massive difference between different banks and financial institutions.
If you think a no penalty CD is a good product for you, it is important to shop around with traditional and online banks, credit unions and other financial institutions, to see which offers the best deal right now.
Bank / Financial Institution
4.25% – 4.75%
When to Consider a No Penalty CD
As we have touched on, there are both positives and potential negatives associated with no penalty CDs. There are a number of circumstances when you should consider a no penalty CD including:
This is the most obvious reason to consider a no penalty CD, as you are not tied to the CD term.
If you decide that you need access to the funds, in most cases, you can initiate a transfer and have the money in your checking account within one or two business days.
This is unusual, but there are some circumstances where a no penalty CD offers a better rate.
For example, the current Ally Bank rates mean that its no penalty 11 month CD offers a higher APY compared to its 3,6 and 9 month high yield CD.
In this scenario, you have nothing to lose with a no penalty CD. If a better rate does come into the marketplace within the CD term, you can withdraw your funds with no penalty to take advantage.
When You May Want to Skip a No Penalty CD?
On the other hand, there are some circumstances when you may want to skip a no penalty CD. These include:
- You have an emergency fund: If you already have an emergency fund and have the cash to cover most situations, you may prefer to skip a no penalty CD and take advantage of the higher rates offered with conventional CDs.
- You’re creating a CD ladder: If you are setting up a CD ladder, it is not very likely that you will need early access to your funds. In this case, you are more likely to shop around for the highest possible rates and CDs offering more flexible term lengths to craft your ladder.
No Penalty CD vs Savings Account: Which Is Better
In comparing a no-penalty CD and a savings account, there is no easy answer as to which one is best, as it all depends on your chosen financial institution.
If you’re looking for the best rates and compare a traditional savings account with a no penalty CD from an online bank, the CD will likely win.
However, the reverse can also be true, if you’re looking at a CD from a traditional bank and an online savings account. So, you must consider like for like products, but there are a few important differences to be aware of.
What Are The Differences?
Firstly, CDs do not allow funding after the initial deposit. You may have a grace period to add more funds, but once this has passed, the money in the CD is locked and you cannot supplement the balance. With a savings account, you can add money as and when you like. This means that if you’re looking for an account to build your savings fund, a savings account is more appropriate.
Another key difference is how you can access your funds. While a no penalty CD will not impose a charge if you withdraw funds, you will need to transfer the money out of the CD, or visit a physical branch to get your hands on the cash. Many savings accounts are provided with an ATM card, so you can simply withdraw the cash you need.
No penalty CDs should still be considered a short to medium term investment vehicle. Ideally, you will leave the funds in the account for the full term. Even if you don’t incur a penalty, if you choose the right product, you should be able to get a better rate compared to the typical savings account, with the reassurance that you can access your cash if you should need it.
No Penalty CD vs Traditional CD: How They Compare?
We’ve already covered some of the fundamental differences between a no penalty CD and a traditional CD, but it may be important to reiterate these.
Traditional CDs tend to offer a better APY, but your money is locked in for the entire CD term. If you need the funds before the CD matures, you will incur an interest penalty. On the other hand, a no penalty CD allows you to withdraw some or all of the funds without incurring an early withdrawal fee.
So, you will need to think carefully about which product is best suited to your specific circumstances and requirements.
As of September 2023, you can get around 3-4% if you deposit your money in no penalty CD for about 12 months.
The interest earned on a no penalty CD varies depending on the bank or financial institution offering the CD and the terms of the CD. It is important to research and compare different options to find the best interest rate and terms for your needs.
A no penalty CD, also known as a liquid CD, is a type of certificate of deposit that allows the account holder to withdraw funds without incurring any penalties.
Unlike traditional CDs, which typically impose a penalty for early withdrawal, a no penalty CD allows the account holder to access their money at any time without penalty.
It is difficult to predict exactly how high no-penalty CD rates will go in the future as they are affected by various economic factors such as inflation and interest rates.
As of September 2023, the expected FED rate suppose to get even higher than the current rate, so no penalty CD rate may go higher in the next couple of months.
It depends on the current interest rates and the terms of the CD. A no penalty CD typically has a lower interest rate than a traditional CD, but it allows you to withdraw your money without penalty.
This can be a good investment option for those who may need to access their money before the CD matures. However, if interest rates are high, you may be able to earn a higher return with a traditional CD.