A reader recently emailed me a few questions about Ally Bank CDs, and I thought this would be a good topic for a post. Ally Bank CDs have been popular since they combine competitive interest rates, attractive features and easy account opening. Unfortunately, Ally Bank's interest rates have been falling like at all other banks. I just checked the rates this morning and noticed the 5-year CD rate has gone down again. It's now 2.24% APY as of the morning of 8/16/2011 (down from 2.26%).
Regarding the question, the reader noted that the interest on her Ally CDs only post at the end of each year, and she wondered if this reduces the compounding and the interest.
This annual posting does not reduce the interest. The interest at Ally is always compounded daily. This maximizes the APY. However, with interest rates so low, there's not much difference between the interest rate and the annual percentage yield (APY). For example, the difference between the 5-year CD rate and APY is only 2 basis points (2.26% APY vs 2.24% interest rate).
For Ally's long-term CDs, the default posting of interest is done annually on December 31st. Another option is to have the interest paid to you by check or transferred to another account. This can be done monthly or quarterly. Of course this will reduce the APY to the interest rate.
After the CD is opened, you can change how the interest is handled. If it's set to post at the end of the year, you can change this so it will be paid out monthly. However, once the interest posts to the CD, it's no longer accessible. You can only change how future interest is posted, not interest that has already been credited. Many banks and credit unions allow you to withdraw any accrued interest in a CD without a penalty. That's not the case with Ally. Once the interest is credited to your CD, it's locked into the CD.
Another thing to note regarding Ally Bank CDs is that they do not allow partial withdrawals. An early withdrawal forces the closure of the entire CD. So it makes sense to open multiple small CDs rather than one large CD. This gives you more flexibility if you need some money in the future.
For the full details of Ally Bank CDs, please refer to Ally Bank's Deposit Agreement (June 18, 2011).
So make sure you consider the above issues if you do decide to apply for an Ally Bank CD. With the Fed's mid-2013 pledge and with rates continuing to fall, CDs are looking more attractive even with today's very low rates.
Ally Bank's three best CDs are its 5-year CD, its 4-year Raise Your Rate CD and its 11-month No-Penalty CD. I compared the 5-year CD with the new 4-year Raise Your Rate CD in this blog post, and I reviewed the benefits of the no-penalty CD in this blog post.