Banking 101: Use the Financial Pyramid to Guide Your Planning
Analysis Shows Only 3% of Americans Have More Access to Post Offices Than Bank Branches
Banking 101: Understanding Debit Card Foreign Transaction Fees
Banking 101: How to Write a Check
Huge Change to Ally Bank CDs Will Benefit Savers
I just learned that Ally Bank has reduced the early withdrawal penalty for all CD terms to only 60 days of interest. This is a huge change especially for the long-term CDs. Ally's early withdrawal had been 180 days of interest for terms over 1 year. Most banks and credit unions have penalties of at least this much, and some have penalties as high as half the term in interest (that's 30 months for a 5-year term!).
You can see that it's official from page 3 of Ally's deposit agreement:
Early Withdrawals - If you need your funds prior to the end of the term, there is a penalty. All CDs will be assessed a 60-day interest penalty. The exception to this limitation is the Ally No Penalty CD.
If you open Ally's 60-month CD that's currently paying 3.15% APY (as of 1/25/2010), here are the approximate APYs that you would earn if you closed the CD early at the following times:
- 2.10% 6 months
- 2.63% 12 months
- 2.80% 18 months
- 2.89% 24 months
- 2.98% 36 months
- 3.02% 48 months
Here's an example how I calculated the effective APYs for a closure at 6 and 12 months:
( (180 days - 60 days) / 180 days ) * 3.15% = 2.10%
( (365 days - 60 days) / 365 days ) * 3.15% = 2.63%
As you can see, many of these rates are much higher than CD rates available today with comparable maturities. In addition, if rates stay low, you don't have to close the CD. You get protection against low rates that short-term CDs don't offer.
Possible Gotchas?
There could be some gotchas. First, with early withdrawals, there's always the concern the bank could refuse the request. Sometimes bank disclosures give the bank the right to refuse (see post). However, I don't see this in Ally's deposit agreement.
The second potential issue is the time and effort it'll take to close the CD. Readers have reported delays and problems in doing early CD closures at Ally Bank. If you have experienced such problems, please leave a comment.
I did an online chat with an Ally CSR, and asked about this. According to the CSR, you have to contact an Ally Advocate who can submit the closure request. This can be done by phone or secure email while logged into your account. According to the CSR, it'll take 3-5 business days to see the funds in your external account if you choose an ACH transfer. A check that's mailed will take about 5-7 business days from the request. The best option is if you have an Ally savings or money market account. In that case it'll take only 1 business day according to the CSR.
One downside with Ally CDs is that they do not allow partial withdrawals of the CD. A 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.
Another downside is that Ally is unable to do a one-time interest withdrawal. The only way to withdraw interest is to set up interest disbursements which can be monthly, quarterly or yearly. This can changed during the term.
Note, banks typically allow you to withdraw accrued interest from a CD without penalty. Only the principal is subject to the early withdrawal penalty.
On the positive side, this new early withdrawal penalty applies to existing Ally Bank CDs. I was told this by two CSRs. As I mentioned, the penalty for long-term CDs used to be 180 days of interest. Currently, this isn't an issue since existing Ally CDs are probably paying much more than what you can get now. It could be useful in the future if rates shoot up.
This new early withdrawal penalty is a brilliant loophole in the FDIC's rate caps. It has been reported that the FDIC is requiring Ally Bank to keep its CD rates under the top 5 in the categories listed at Bankrate.com. This came about last year when the American Bankers Association complained to the FDIC about Ally Bank's high rates. Let's hope the bankers don't notice this.
Credit for this find goes to FW member fatwallet21 who mentioned this news in the FW CD thread.
Happy now?
Could they perhaps go the other way in the future and change it back to a 6 month early withdrawal penalty that applies to existing CDs as well?
Would the new bank honor the same withdrawal penality.
I'd be more concerned with refusal or inability to break the CD than that. Has anyone every had a bank refuse to cash in a CD?
The banks reserve their rights to change or amend the disclosure statements at any time without prior notice. The customer is irrelevant and has no say in the banking manipulations.
The FDIC's (and ABA's) complaint is that they were raising rates. They are using deposits to finance loans; the deposits are cheaper than trying to go to the market with paper, since they (GMAC) are such damaged goods. So, they have to find creative ways to attract the deposits without running afoul the interest rate limits now on them.
Unless someone with some power complains, Ally will continue to implement policies such as this one. And they aren't going to change them unless they are forced.
This Ally penalty is attractive, but they don't permit IRAs, so I'm looking for somewhere that does with low early withdrawal penalties.
Perhaps somone should determine for us at what penalty does the return equal what we would otherwise be able to get in CDs of particular terms.
If terms change they will allow you to bail out within 30 days of term chanmges so no risk with the penalty being extended.
Another thing to keep in mind with CD terms that extend beyond the end of 2013 - FDIC insurance coverage is subject to revert back to $100K from the present $250K, so for those who have more than $100K to sock into a long term CD, it may be best to open multiple accounts that don't exceed $100K, and close all but one if/when the change takes place.
First one referred me to the "Introduction" in the "deposit agreement" which states that Ally may change any terms they wish at any time and further stated that if Ally did choose to alter the original terms of a CD, the customer could opt to cancel/terminate the CD but would be required to pay the early withdrawal fee specified in the original terms (currently 60 days).
Second CSR checked with her supervisor and then wrote that the first CSR incorrectly referenced the "deposit agreement", stating that the deposit agreement "is not concerning Ally Bank's CD accounts."
However, she also stated that "Once you open a CD account with Ally Bank, you are locked into those terms and conditions until the account reaches the end of it's term. If the policy were to change, we would notify you in writing and we cannot change your penalty agreement that you locked into at account opening."
She didn't at anytime state that any policies or terms that might change were restricted to the early withdrawal penalty. She left open the possibility that Ally could, if they wished, make other changes to the CD terms. She also confirmed that if the CD holder opted to close/terminate the CD upon notice of changes to the terms of their CD, Ally would assess the (currently) 60-day early termination fee.
I mentioned that reserving the right to make whatever changes Ally wishes to make to the terms of existing CDs and also imposing penalty fees should the CD holder decide to cancel the CD does not seem reasonable. I believe something is in error and that Ally would not place it's customers in such a precarious position. It would be as if, for example, a cell phone company offered long-term contracts containing expensive early termination fees, inserted a clause in all contracts allowing them to make any changes they liked to existing contracts and charged the customer the early termination fee regardless of what terms of the contract they chose to revise, if the customer cancelled. Ally certainly could make a great deal of extra money, if what the 1st CSR told me was actually true. Ally could (not that they WOULD, but they COULD), theoretically, reduce the interest rate to 0 or perhaps even a negative number or make any change they wished and then charge the CD holder a 60-day penalty fee should the CD holder decide to cancel the CD.
Actually, theoretically, Ally could, according to the info I was provided, horribly abuse CD-purchasers so I think the info I was given must be incorrect. For example, 2 months after the individual purchased a CD, the bank could, if they wished, send notice that the terms were changing - in some unacceptable manner, then assess the individual the original penalty of 2 months worth of interest and have used the individual's funds, entirely interest free, for those 2 months.
(I would think that if a bank or other FDIC-insured (or like) institution reserved the right to revise the terms of a CD prior to the CDs maturity, they would be legally prevented from also demanding the original early withdrawal penalty fee, if the CD-holder found the new terms unreasonable or unacceptable.)
I decided to open accounts on 4/5/2010 where it asked what my opening deposit would be- bad mistake should have waited or put less dollar amount. On 4/6/2010, I noticed the tail deposit were entered in Schwab not so high yield account but dated 4/7/2010. So I took note of the tail deposits and entered them in to Ally’s external accounts and at this point it was verified. Thinking it would start the ACH at this point I didn’t give a second thought.
On 4/8/2010 after I logged into my account and noticed the pending transfer option and I looked at it and saw the date of 4/9/2010 so I chatted with the online rep about this and was informed that was the “start date” of the ACH! When it should have started after the tail deposit were entered in on 4/6/2010 and I would receive “goodwill interest” while it’s being transferred.
Then all hell broke lose I was locked out of my account and no one would talk to me and not give me any reason at all and I was told I needed to call there fraud department(not knowing this at the time) to clear things up. So I called and left a message to call me, but be some what ****ed off about this as no one would let me know what’s going on and my money was going to be taken from my Schwab account and I wouldn’t be able to access it. I decided to call Ally back and demand to talk to a supervisor there, but again the door was closed on me with no information on what’s going on. I informed them unless someone from Ally back would contact me today and if any money was taken from Schwab account at this point it would be unauthorized I would sue them.
Amazing I got a phone call a few minutes later. While on the phone with this person I asked why Ally is treating me like this. You would have never guess the answer –“To protect me”
Apparently I entered to much money to be opened with the account. But you know they should have called if they thought something was wrong and not wait until the transfer was going to be begun or end depending on who you talk to there. After the phone call from the fraud department my account was unfrozen and I was able to access it once gain.
Before Ally’s fraud department called I was stressed out about this and I called Schwab to block Ally from taking my money and they set it up so it would reject, however they could not guarantee it since Ally might have another routing number.
At this point I wanted someone’s head on a platter from Ally for putting me threw this and now that they were willing to talk to me as I have been proven by the high court of Ally’s fraud department to be not guilty of any crimes against humanity. I demanded a written letter from them stating they were sorry and would find a better way to deal with this type of problem.
Final thoughts… Was it worth the aggravations of it to get 1.29 APY? Knowing what you got from Schwab priceless.