Dedicated to Deposits: Deals, Data, and Discussion

Review of Liquid Certificates of Deposit - Gimmicks or Worthwhile Deals?


As I described in my previous post on features and issues of CDs, there are both pros and cons to regular CDs. Liquid CDs remove some of the downsides. There are many kinds of liquid CDs. Some are gimmicks, but in my opinion, there are some useful liquid features. The two most useful types in my opinion are the add-on CD and the penalty-free CD.

Add-On Feature

An add-on CD is one that allows additional deposits during the term. The additional deposits don't affect the maturity or the rate. The new money earns the original rate of the CD. This can be useful when rates are likely to fall or stay low. Even if you think rates will head up, it can serve as a back-up CD just in case rates remain low when future CDs mature.

Not all add-on CDs are created equal. Many limit the add-on deposits to the amount of the initial deposit. For example, if your initial deposit was $10,000, the most you can add during the term would be $10,000. Such a limit is a big drawback compared to those add-on CDs that have little or no limit especially if you plan to use them as a back-up CD.

The unlimited add-on CD can be great for a depositor, but it can be very costly for an instituion. There have been cases in which institutions did not fully honor the unlimited add-on feature. This is rare, but it is a possibility.

Penalty-Free Feature

A CD that allows penalty-free withdrawals can be useful if you think rates are going to rise. You can redeem the CD before maturity without any cost and invest the money into a better paying account. It's also useful if you think you might need the money before maturity.

Banks will often have various limits and restrictions on the free early withdrawals. You might be limited to the number of withdrawals. Also, the bank may not allow you to withdraw more than a certain percentage of the initial deposit. In another restriction, a bank may not allow partial withdrawals and will force you to withdraw all of the funds which will close the CD. Ally Bank's No Penalty CD is an example of this.

Bump-Up Feature

There are other types of liquid features, but they're not as useful in my opinion. One common feature is the bump-up which gives you the option to raise the rate of the CD during the term to the current rate of new CDs. These can give you an option to raise rates one or more times. Theoretically, these can be useful if you think rates will rise. However, it's easy for banks to keep the rates of future CDs with the same terms low. This is especially true if the CD has an odd term, and the bump-up feature will only apply to a CD with that same exact term. So even if rates overall are going up, it doesn't mean the rate of the same CD at that bank will also be going up. If the rate does go up, it may lag behind similar CDs at other institutions.

Trade-offs

These liquid CDs often come with a cost which is lower rates. However, that's not always the case. One example is Ally Bank which offers its no penalty 9-month CD with a higher rate than its classic 9-month CD. This is likely due to the bank using the liquid CD as a promotional tool. For these cases, there's no reason to choose the regular CD over the liquid CD.

Best Liquid CDs

For my next post on liquid CDs, I'll list the ones that are available nationwide. I already list a few liquid CDs in my weekly CD rate summary.
  Tags: CD rates

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