No Penalty CDs an Idea Whose Time Has Come
August 06, 2009
Back in the good old days, the best CD rates on a one year CD could reach 5 percent. Today, the best CD rates for a one year CD are in the range of 2.5 percent. However, there is one newfangled CD product that's better than the good old days: the no-early-withdrawal-penalty CD.
Banks such as Ally and Discover are scrambling to bring no penalty CD products to market. The no penalty CD benefits from a couple major trends at work in today's banking environment:
Liquidity Is More Valuable Than Ever
Typically, the penalty for withdrawing a CD before it has fully matured is six months interest. In today's economy, with unemployment at a 26- year high and the stock market moving (at least temporarily) upwards, many people prefer the advantage of liquidity over the advantage of getting 2 percent on a one year CD.
The no penalty CD directly appeals to this liquidity-hungry crowd.
Banks Are Borrowing at Zero Interest Anyways, So What's the Harm?
With the Fed funds rate set at near zero and bank profits starting to shape up, the motivation for banks to charge penalties for withdrawing CDs early is negligible.
The upside from attracting customers with a notable offer that hasn't historically been available makes more sense (and dollars) than insisting that depositors not touch their money for the full term of the CD.
