Long-term saving can be confusing. There are a lot of places to put your money, with varying degrees of risk.
When considering a certificate of deposit (CD) as a savings method, it's important to understand the difference between traditional bank vs. brokered CDs. Learn more about each type, as well as the advantages and disadvantages.
- Bank CDs are offered by banks and credit unions.
- Brokered CDs are bought and sold by a third party.
- Bank CDs are easy to purchase but may be costly if you want to withdraw your money from them before the CDs' maturity date.
- Brokered CDs are easy to get out of, but you may lose money on them if interest rates are rising.
What Is a Bank CD?
Bank CDs are long-term savings instruments that are offered directly by various banks and credit unions. These banks take in deposits via CDs with the intention of loaning these funds out. Because money invested in a CD is locked up for a period of months to years, the bank has less risk in terms of depositors withdrawing money that could be used for such loans. Often a bank will offer CDs with different maturities, with the yields increasing over time.
What Is a Brokered CD?
Brokered CDs are brokered by a third party. They are bought by brokerage firms and then resold to consumers. Sometimes brokered CDs have significant fees and may not be as low-risk as you think.
Advantages and Disadvantages of Bank CDs
You can walk into any bank branch or buy bank CDs at any time at online-only banks.
If you wish to get out early, you must forgo some interest but you get to keep your entire capital.
Bank CDs are the more traditional savings vehicle. You can walk into any bank branch or buy them at any online-only bank easily. For most people who have less than $250,000 to invest, bank CDs are usually a better deal.
If you want to get out of a bank CD early, usually you must give up some interest, but you get to keep your entire capital. Before you get any CD, you should get informed about what you are buying by asking the right questions.
Advantages and Disadvantages of Brokered CDs
It's easy to deposit large amounts of money in different banks through the brokerage firm.
With rising interest rates, you would lose money if you sold a brokered CD early.
The biggest difference between bank CDs and brokered CDs is the way they are bought and sold. Brokered CDs are bought and sold by brokerage firms instead of directly by the bank.
If you want to get out of a brokered CD early, then you sell the CD like you would a stock, bond, or mutual fund. Instead of closing it out—as you would at a bank—you're selling it on the secondary market.
It's always a good idea to shop around for the best CD rates because they can vary quite a lot between institutions.
In an environment where interest rates are rising, if you sold a brokered CD early, you're likely to lose money.
The biggest advantage of brokered CDs is the ease of depositing large amounts of money in different banks through a brokerage firm. This allows you to keep your deposits under $250,000 at each institution, which means that you are insured by the FDIC.
Frequently Asked Questions (FAQs)
What fees will you pay?
Fees take a chunk out of any earnings you make on your CD. Most of the time, banks don't charge fees on CDs, but brokerage firms often do. It's important to know exactly what you're being charged and how it will affect your actual earnings.
Who has the highest rates?
For investors with lower amounts of money, usually online banks have the very best rates. If you have a significant amount of money to invest—$100,000 or more—sometimes you can negotiate higher CD rates with your bank. Often, local banks will give you better rates than big national banks.
What's the penalty for early withdrawal?
Most banks charge early withdrawal penalties equal to 90 days of interest. But this can vary from bank to bank, so it's important to check. With brokered CDs, you have to sell your CDs like a stock or bond, so it's a good idea to make sure that you have the money to stick with the CD the whole time, as there is no guarantee of the price you’ll get.
How difficult is the CD to understand?
Bank CDs are usually straightforward. Brokered CDs can be more complex. Sometimes brokered CDs are callable, meaning that they can be bought back within a certain period of time. This makes it harder to lock in a good rate over the long term.