What Is a No Penalty CD?
A no penalty CD is a type of certificate of deposit. A certificate of deposit, or CD, is a financial product offered by banks and credit unions for personal savings and investing. It offers an interest rate incentive in exchange for a guaranteed deposit (no withdrawal) for a set period of time. If you withdraw your money from a conventional CD before maturity, you will pay a penalty.
A no penalty CD does not impose fees for early withdrawal. In exchange for foregoing the penalty, banks usually offer to pay a lower interest rate for a no penalty CD.
How Does a No Penalty CD Work?
Opening a no penalty CD is very much like opening any standard bank deposit account. Shopping around is key since rates and terms vary widely. You should note four key details:
- The interest rate. The interest rate is set for the duration of your CD, so your interest earnings are also fixed. If interest rates rise during the CD’s lifetime, you will miss out on higher earnings, but you are protected if interest rates fall.
- The term. The term is the length of time you’ve agreed to allow the bank to hold your money and it ends on the “maturity date.” With traditional CDs this is an important date because withdrawals made prior will face fees; a no penalty CD will face no fees if money is withdrawn prior to the maturity date.
- The principal. This is the amount you agree to deposit when you open the no penalty CD.
- The institution. Some banks and credit unions will automatically reinvest the funds after the maturity unless you instruct them otherwise.
Once your no penalty CD is funded, the bank or credit union will manage it like other deposit accounts. You will receive either monthly or quarterly statements and monthly or quarterly interest payments deposited to your CD balance, where the interest will compound.
Why a No Penalty CD Matters
No penalty CDs can be an attractive product for account holders who are not comfortable with locking up their funds. In fact, they’re often presented as an alternative option to a traditional savings account. In exchange for the added liquidity, banks and credit unions will typically offer a lower interest rate than a traditional CD.
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