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Comparing CDs from Ally and Discover Bank

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Comparing CDs from Ally and Discover Bank

Last week when Ally Bank introduced several new products including IRAs, I was a little disappointed Ally Bank didn't come out with longer-term CDs. I had thought they may want to better compete with Discover Bank which offers 7-year and 10-year CDs and IRA CDs. Ally's longest term continues to be 5 years.

You might think even a 5-year CD is way too long in today's environment in which interest rates could shoot up any month due to inflation or a debt crisis. However, this fails to consider the early withdrawal option for CDs. It also fails to consider the other risk: rates stay low for many years.

There are worries that banks could increase early withdrawal penalties or make it more difficult for customers to leave a CD if interest rates shoot up. As I described in this post, a credit union has already done this.

When we first learned of Ally Bank's early withdrawal penalty of only 60-days of interest, several readers were informed by Ally Bank reps that Ally had the right to change the early withdrawal penalty on existing CDs with 30-day notice. I investigated this, and received assurance from Ally Bank's public relations director that Ally would not change the early withdrawal penalty on existing CDs (see post). Of course, this doesn't eliminate the risk. To reduce the risk that all of your money will be stuck in low-yield long-term CDs if rates shoot up, you might want to consider CD ladders and using multiple banks and credit unions.

For terms of 5 years and under, Discover Bank CDs don't offer any advantages over Ally Bank CDs. Discover may have a slight edge on some of these CD rates, but the early withdrawal penalty is larger. Ally's EWP is 60 days of interest for all terms (see Ally's account disclosure). Discover Bank's EWP is described in its FAQ page and is as follows:

  • 3 months simple interest on the amount withdrawn for terms under 1 year
  • 6 months simple interest on the amount withdrawn for terms from 1 to 5 years
  • 9 months simple interest on the amount withdrawn for terms over 5 years

Discover Bank has an advantage for terms over 5 years. The rates are higher. Of course the term is longer and the penalty is larger so you will have to do the trade-off analysis. On the plus side, the 9-month EWP isn't that bad for terms over 5 years. Many institutions have a penalty of 12 months or more of interest for terms over 5 years.

To help you make that trade-off analysis, I did another early withdrawal yield table. I compared Discover's 5-year and 10-year CDs with Ally's 5-year CD. I listed the effective yields when the CDs are closed early for each year after account opening. The yields take into account the early withdrawal penalties. As you can see, Ally Bank's 5-year CD has the best rates before 3 years. Discover Bank's 10-year CD takes the lead at 3 years.

The early withdrawal yields listed below are based on the spreadsheet developed by Bogleheads forum members. It's available from the Bogleheads Wiki: Comparing CDs. It should be noted that the following simple formula comes very close to this spreadsheet:

Post Penalty APY = (Full APY) x (D - P) / D

D = days into term when the CD was closed.
P = days of the early withdrawal penalty

These CD rates are based on the rates listed at the institutions' websites as of 6/27/2011:

Approximate Yields After Early Withdrawal Penalties

Year of Early Withdrawal Discover's 10-yr 3% CD Discover's 5-yr 2.35% CD Ally's 5-yr 2.34% CD
Early Withdrawal Penalty 9 months 6 months 2 months
year 1 0.74% 1.17% 1.95%
year 2 1.86% 1.76% 2.14%
year 3 2.24% 1.95% 2.21%
year 4 2.43% 2.05% 2.24%
year 5 2.54% 2.35% (no penalty) 2.34% (no penalty)
year 6 2.62% n/a n/a
year 7 2.67% n/a n/a
year 8 2.71% n/a n/a
year 9 2.75% n/a n/a
year 10 3.00% (no penalty) n/a n/a

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To search for nationwide CD rates and CD rates in your state, please refer to the best CD rates section of DepositAccounts.com.


  Tags: Ally Bank, Discover Bank, CD rates, IRA rates

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Comments
4 Comments.
Comment #1 by Anonymous posted on
Anonymous
I believe you might be making a mistake to tout Ally Bank as you have.  There should be absolutely no doubt in anyone's mind about Ally changing the terms of early withdrawal should there be massive numbers of people clamoring to get out of their instrument.  So long as unemployment remains high and capacity utilization in the U.S. remains under 80%, demand pull inflation won't be an issue.  Cost push, as we all know, has been somewhat dramatic because of commodities.  Whether Bernacke is right will eventually be determined (his ability to wash the almost 3 trillion of treasuries and other securities in the Fed's portfolio).  Whether commodity prices get muted as Bernacke anticipates will soon be known.   More things can go wrong than can go right.  Enough wrong things and inflation, even at the core, will go up.

 

7
Comment #2 by Anonymous posted on
Anonymous
I would be careful with just assuming a bank will allow you to close a CD and just charge you the penalty. I do believe most banks say they don't have to close them and give you your money early. Sure, most probably would......but who knows.

 

7
Comment #3 by Anonymous posted on
Anonymous
Does the above chart include compounding or does it assume a yearly check will be the choice or the CD holder?

1
Comment #4 by Anonymous 1 (anonymous) posted on
Anonymous 1
Anyone who opens a 5-10 year CD at the current interest rates, at either bank, is a fool.  There is no doubt that the tripling of the high-power monetary base is going to spur a huge amount of inflation once the money multiplier factor gets back into operation.  Even in this depression period, prices are rising.  can you imagine what will happen when we finally exit it?

Moreoever, the dollar is going to collapse when the U.S. government runs out of money to pay its bills, or, in the alternative, if it prints more funny-money to pay bills, then it will also collapse.  Precious metals will soar in this environment of instability and defaulting sovereigns.  Keep your money in the highest paying liquid money markets and drain out appropriate amounts of cash to buy gold, silver and platinum when they experience big price dips.

With China on the rise, and America's economic power tottering on the edge of collapse, people who invest for long terms in banks paying little to no interest deserve to lose buying power.

1