No-Penalty CD Change at Ally Bank and an Update on the Early Withdrawal Penalty for Regular CDs

Ally Bank increased the term of the no-penalty CD from 9 to 11 months, and it also increased the yield from 0.99% to 1.35% APY.

According to Ally's description of the no-penalty CD:

We'll hand over your full balance and interest any time after the first 6 days of funding your CD

Ally Bank first introduced the 9-month no-penalty CD in May 2009 when the yield was 2.50%. Since that time, the yield has gone down, and it finally bottomed at 0.99% APY. That was 30 basis points below the savings and money market rate, and this had me wondering why would anyone want this CD at that low rate. Now that the no-penalty CD rate is again higher than the savings account rate, there is a little incentive to lock in that rate to hedge against continued falling rates. If rates rise or you need the money, you can make the penalty-free withdrawal.

Ally's 60-Day Early Withdrawal Penalty on Its Regular CDs

Even though the no-penalty CD rate increased, it's still rather low at 1.35% APY. Another alternative is go with Ally's long-term CD. These have an early withdrawal penalty, but it's a very mild penalty, only 60 days of interest (see page 3 of Ally's disclosure).

If you opened Ally's 5-year CD which has a 3.09% APY (as of 3/25/2010) and did an early closure at 9 months, you would lose about 2 months of interest. So the effective APY would be about 7/9th of original APY which comes out to 2.40%. A closure at 4 months would essentially cut your CD interest in half resulting in an APY of about 1.55%. I have more details on doing this math in my review of Ally's early withdrawal penalty.

Could the Early Withdrawal Penalty Increase?

As I reported last Friday I received assurances from the Director of Public Relations at Ally Bank that this early withdrawal penalty would not be increased on your existing CDs. Readers had been receiving conflicting info on this from Ally CSRs. According to the director, they are in the process of communicating this info to the CSRs so you should be able to confirm this in your future correspondence with them. It appears this process isn't quick. A reader commented on Tuesday that he was told by the CSR that the penalty could be changed on existing CDs. So I emailed the director again. Here's an excerpt of his reply:

We should be complete with training soon. Regarding this issue, your readers can rest assured that the terms under which they purchased their CDs will be honored through maturity.

If you still don't get this assurance from Ally's CSRs, please leave a comment.

Increasing the early-withdrawal penalty on existing CDs is not a typical practice. This question was asked at Ask a Banker, and here is what they said:

In most cases the terms of an CD agreement can't be changed during the contract period unless you agree to the changes. Ongoing accounts such as checking or savings accounts include a provision whereby you may be given adequate notice (30 days) before a change occurs. If you don't agree to the change, such as a fee increase, you are free to close the account.

Increasing the penalty for closing a CD early is not a normal change. Call the bank and ask to speak to a bank officer about this. They shouldn't be able to do it any more than you could tell them you have reduced the penalty to 45 days. Again, an allowance to modify the CD contract unilaterally would be very unusual.

This Ask-a-Banker answer doesn't have any official standing, but it does point out that it's quite reasonable to expect the terms of the CD agreement to remain in effect until maturity. Any bank to make such a change would be the kind of bank that Ally mocks in its commercials.