If you're looking for a short-term CD with a maturity under one year, you should consider Ally Bank's 11-month No Penalty CD. The no-penalty feature allows you to make the CD have any maturity that you want from 7 days to 11 months. Thus, the only reason to choose a 3-month CD or 6-month CD is if it has a higher rate than this 11-month CD. Ally's 11-month No Penalty CD rate may be low (0.96% APY as of 12/08/2011), but it's higher than the best 3-month and 6-month CD rates available at both internet banks and credit unions.
One reason some people may be hesitant with this No Penalty CD is that they may not think it will be easy to close the CD before the 11-month maturity date. To see if this might be an issue, I gave this Ally 11-month CD a try.
Opening an Ally Bank CD is very easy especially if you already have an Ally Bank savings or checking account. I've always funded an Ally CD using money from my Ally savings account. One feature of Ally CDs came in handy when I opened this 11-month CD. A few days after I opened the CD, the rate went up. Due to the Ally Ten Day Best Rate Guarantee, I automatically received the higher rate.
Before the CD was one month old, I decided it was time to test the closing procedure. Ally doesn't provide a CD management interface. You have to contact Ally with closing instructions. I provided the instructions using Ally's secure online chat service. This can also be done by phone. I wanted the CD closed and the funds transferred to my Ally savings account. I was asked to provide the last four digits of my CD account number and savings account number. After about 3 minutes, the CSR gave me confirmation that the CD was going to be closed and the funds (principal and accrued interest) transferred to the savings account.
It looked like the closing process was going to be quick and easy. However, there was one minor issue. The CD cannot be closed immediately. It takes 2 business days for Ally to process the request. The CSR informed me of this 2-day delay as part of the confirmation. He said it could be sooner, but it turned out to be very close to 48 hours after the closure request.
When the closure and transfer were completed, I checked the transfer amount, and I confirmed that all of the principal and accrued interest were transferred correctly. As promised, there was no early withdrawal penalty. The accrued interest included the 2 extra days it took to process the closure.
If you may need quick access to your money, Ally's savings, money market or checking accounts would be the better choice than the No Penalty CD. If you don't mind the 2-day wait, the No Penalty CD gives you a little higher rate along with an 11-month rate lock.
Ally's rate history over the last 11 months can provide some insights into the benefit of the rate lock. At the start of this year, Ally's No Penalty CD yield was 1.20% and its savings account yield was 1.09%. That savings account yield has fallen to 0.89%. The average yield over those 11 months is approximately 0.99%. So over the 11 months, the No Penalty CD had a yield of about 21 basis points higher than the average savings account yield. That would have resulted in an extra $193 for a $100,000 deposit.
There are a couple of other downsides with the No Penalty CD. First, you can't close the CD before 6 days of funding the CD. Second, you have to close the entire CD. Ally doesn't allow for partial withdrawals.
These downsides are minor, but I don't know if the rate spread of the No Penalty CD over the savings account is large enough to make it worthwhile. The No Penalty CD makes more sense than Ally's lower-rate 3-, 6- or 9-month CDs. In fact, the No Penalty CD makes more sense than Ally's 1-year CD since the 1-year CD rate isn't that much higher than the 11-month CD rate. However, I still prefer Ally's 5-year CD over the No Penalty CD. The 5-year CD rate is much higher, and the small early withdrawal penalty of 60 days of interest is almost as good as no penalty at all. I reviewed Ally's 5-year CD and long-term CDs at other banks and credit unions in my recent blog post Comparing the Best CD Rates After Early Withdrawal Penalties.