I first reviewed Ally Bank's 2-year Raise Your Rate CD in this January post. The rate has gone down a bit, but the rate remains competitive even without the bump-up feature (it's 2.04% APY as of 3/09/2010). Ally's 5-year CD currently pays more than a percentage point above this (3.09% APY as of 3/09/2010). So which is the better option?
Both CDs have an early withdrawal penalty of only 60 days of interest. As I described in my survey of penalties, this is much better than what other banks offer. As I showed in my review of Ally's 60-day penalty, the effective 2-year yield if you do the early withdrawal from the 5-year CD at year 2 would be over 2.80%. Once the funds are withdrawn, you can then reinvest the money into a savings account or CD with higher rates if interest rates have gone up.
With the 2-year Raise Your Rate CD, you have the option to bump-up the rate one time during the 2-year term to Ally's current 2-year CD rate. It's quite possible that we'll see higher rates in 2011, so this can provide a little protection, and you don't have to depend on the 60-day early withdrawal penalty.
This Raise Your Rate feature does depend on Ally keeping the 2-year CD rate competitive. Ally Bank has a history of keeping their rates competitive although I'm a little disappointed by Ally lowering its 9-month no-penalty CD to under 1.00%.
Some readers have pointed out that it's possible that Ally Bank could increase the early withdrawal penalty during the term of your CD. I can't say how much of a possibility this is. Based on my reading of Ally's disclosure and my conversations with the CSRs, I have felt confident enough that I've put some of my own money into these 5-year CDs.
My experience opening Ally Bank's CDs has been very positive. I was able to choose to have the CD funded with money from my Ally savings account. Since I was already a customer, I didn't have to enter my personal info. You can also have the CD funded from an external account.
One thing to note if you're going to open an Ally CD is that they can't do partial withdrawals. An early withdrawal of any amount of the principal will cause the closure of the CD. So it makes sense to open multiple small CDs instead of one big one. Since the CDs don't have a minimum requirement, you don't have to worry about not being able to afford it. However, keep in mind that if you use your Ally savings or money market account to fund the CDs, each withdrawal counts toward the 6-per-month withdrawal limit. That may be one more reason to open an Ally Bank interest checking account which doesn't have these withdrawal limitations.