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.
What Is a Bank CD?
What Is a Brokered CD?
Brokered CDs are, as the name implies, brokered. 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 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.
In an environment where interest rates are rising, if you sold a brokered CD early, you’re likely going to lose money.
The biggest advantage of brokered CDs is the ease of depositing large amounts of money in different banks through the brokerage firm. This allows you to keep your deposits under $250,000 at each institution, which means that you are insured by the FDIC.
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.
It’s always a good idea to shop around for the best CD rates because they can vary quite a lot between different institutions.
Questions to Ask About Any CD
Before you make a decision on which CD to invest in, you will need to ask a few questions so you can be sure you're making the right choice.
What Fees Will You Pay?
Fees take a chunk out of any earnings you make in 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.
Who Issued the CD?
If you are buying directly from a bank, then the bank will have issued the CD. If you’re buying from a brokerage firm, CDs are usually bought in bulk, and then divided up among investors. Brokerage CDs are sometimes of lower quality but have higher returns. So, they are riskier.
Most People Are Better Off With Bank CDs
Generally speaking, you need to have a significant amount of money to put into CDs in order to justify using a brokerage firm. Most people are better off getting CDs from their local bank or an online bank.