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Ally Bank's 5-Year CD and 2-Year Raise Your Rate CD - Which is Better?
I first reviewed Ally Bank's 2-year Raise Your Rate CD in this January post. The rate has gone down a bit, but the rate remains competitive even without the bump-up feature (it's 2.04% APY as of 3/09/2010). Ally's 5-year CD currently pays more than a percentage point above this (3.09% APY as of 3/09/2010). So which is the better option?
Both CDs have an early withdrawal penalty of only 60 days of interest. As I described in my survey of penalties, this is much better than what other banks offer. As I showed in my review of Ally's 60-day penalty, the effective 2-year yield if you do the early withdrawal from the 5-year CD at year 2 would be over 2.80%. Once the funds are withdrawn, you can then reinvest the money into a savings account or CD with higher rates if interest rates have gone up.
With the 2-year Raise Your Rate CD, you have the option to bump-up the rate one time during the 2-year term to Ally's current 2-year CD rate. It's quite possible that we'll see higher rates in 2011, so this can provide a little protection, and you don't have to depend on the 60-day early withdrawal penalty.
This Raise Your Rate feature does depend on Ally keeping the 2-year CD rate competitive. Ally Bank has a history of keeping their rates competitive although I'm a little disappointed by Ally lowering its 9-month no-penalty CD to under 1.00%.
Some readers have pointed out that it's possible that Ally Bank could increase the early withdrawal penalty during the term of your CD. I can't say how much of a possibility this is. Based on my reading of Ally's disclosure and my conversations with the CSRs, I have felt confident enough that I've put some of my own money into these 5-year CDs.
My experience opening Ally Bank's CDs has been very positive. I was able to choose to have the CD funded with money from my Ally savings account. Since I was already a customer, I didn't have to enter my personal info. You can also have the CD funded from an external account.
One thing to note if you're going to open an Ally CD is that they can't do partial withdrawals. An early 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. Since the CDs don't have a minimum requirement, you don't have to worry about not being able to afford it. However, keep in mind that if you use your Ally savings or money market account to fund the CDs, each withdrawal counts toward the 6-per-month withdrawal limit. That may be one more reason to open an Ally Bank interest checking account which doesn't have these withdrawal limitations.
Please be aware that some CSRs are unaware of this and will tell you that you can reject new terms and stay with original terms on the CD, you will not receive anything like this in writing. This is why I tried to email them to at least have an email response, but email responses and further conversations with CSR confirmed the worse... :-(
Just moved my 9mo no-penalty CD in several smaller 5-yr CDs, and they granted a %.25 renewal bonus, as well as the 10-day best rate. Another benefit - Ally's rates are uniform independent of the deposit amount, so no jumbo deposits required to get the premium rate, making it easy to stack up a bunch of identical smaller CDs. Their competitive rates aren't the highest, but their terms provide the optimal balance of return and flexibility, at least to my calculation and taste.
I asked two different CSRs about potential changes in early withdrawl penalties. They both stated that the terms stated in the Deposit Agreement issued at account creation time will last for the life of the CD. I hope that's true.
The only downside is that they mail separate account creation packets for each CD. If you're a joint account holder, that's double the mailngs.
Over the past year or so, I have found Ally's customer service to be truly superb: Short wait times, published right on the front page of the web site, always easy to reach a human 24x7, and knowledgable, friendly CSRs. Coupled with a great web site and innovative products, I have found Ally to be a great place to bank.
I agree that Ally CSR (either online chat or phone) is superb and they will work through any kinks graciously.
"In response to your inquiry, if you opened a CD and Ally Bank changed the penalty from what is equivalent to 60 days worth of interest, to a different amount, this would apply to all CDs, new or existing. I apologize for any incorrect information you have received."
First, 23 month or 25 month CDs are not exactly unknown in the banking industry. Neither 23 nor 25 is equal to 24. But both terms provide ample functional substitution for a 24 month CD, from the bank's standpoint. Thus, there never will be a pressing reason for the bank to raise its 24 month rate. This will avoid, for the bank, any "bumps in the road" whatsoever.
On changing the early withdrawal penalty:
The penalty can only be changed provided the right to do so is claimed and reserved by the bank in the original CD terms. I am not an Ally Bank customer. I do not have a copy of Ally Bank CD terms, and I have not read their terms or conditions. But a CD is governed by a contract between depositor and bank, with rights and responsibilities being assigned therein to both parties. If the bank has not reserved, in the terms of the original CD, a right to change penalty terms at their discretion, then they can't change squat.
And let's face facts:
If the bank did reserve such a right for itself, who would want to invest in their long term CD?!! After all, it's not the highest rate you can get. The entire attraction is the small penalty. So if the penalty is subject to change on whim of the bank, who needs such a CD!!!!! If they really are allowed to change penalty terms, they can be relied upon to do so at precisely the time, in future, when you will want to exercise your early withdrawal privelege. And you can take that to the bank! Also and finally, if they are indeed permitted to change the penalty terms in future without limitation, they could impose any withdrawal penalty whatsoever; anything they wished. They could change the penalty, for example, to loss of a year's interest!! You can suit yourself, but I would never invest my CD money under such circumstances. Doing so would be silly.
I am sorry. But there is simply no such thing as a free lunch.
Much thanks to this site!
Also, I take it no one is too concerned about Aly honoring the right to withdraw (although many of us are buying 5 yrs. in anticipation of withdrawing since we know we don't want to be locked in for 5 yrs.) -has anyone ever tried to do that at Ally?
While Ally has told me we will get notice if they change the any of the terms in the deposit agreement- that has not been my experience, as I am a current cd holder & never received notice of changed terms--so I think we have to consider a 6 month penalty since wouldn't it seemlikely Ally would move it back up as soon as rate hikes look appraent?
Also-is anyone concerned about Ally honoring the withdrawel right under these circumstances-since many of us are buying the 5 yrs in anticipation of withdrawing?
Did I miss an actual verdict on which CD is better? ("Ally Bank's 5-Year CD and 2-Year Raise Your Rate CD - Which is Better?")
All I see is a suggestion that the bump-up might be better if interest rates increase (substantially) -- but that's a pretty big 'if'.