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Credit Unions on the Hunt for Small Banks
After the Equifax Debacle, Does Your Bank Have Your Back?
Is Your Credit Union a Part of the Shared Branch Network?Comparing Rates of Long-Term CDs After Early Withdrawal Penalties
Several banks and credit unions have been cutting their CD rates since the Fed's mid-2013 pledge. This has been especially true for Ally Bank. Its 5-year CD APY has fallen from 2.32% to 2.14% since that mid-2013 pledge. Discover Bank's 5-year and 7-year CD rates have also fallen. However, its 10-year CD APY is still 3.00%. It has remained this way for almost a year, and don't forget AAA members can receive an extra 5 basis points. This is one of the very few CDs where you can still get a 3% APY.
Ten years is very long, but Discover Bank's early withdrawal penalty for this CD is 9 months of interest. So you can close the CD early with this penalty. How much does this penalty affect the yield when you close the CD early? One easy example is if you close the CD at 18 months. The 9-month penalty would erase half of your accrued interest. That would cut your effective yield in half from 3% to 1.50%. As you can see in our 18-month CD rates table, this compares very favorably with the best 18-month CD rates.
Ally Bank has the most favorable early withdrawal penalty of 2 months of interest. However, its 5-year CD yield is quite a bit lower than Discover's 10-year CD yield. So if you're going to close these CDs early, it's not obvious which CD would be the best.
Ally Bank's 5-year CD rate has fallen so much that there are a few credit unions which currently offer much higher 5-year CD rates. As of 9/8/2011, the best nationally available 5-year CD APY is 2.68% at Melrose Credit Union. The second best is 2.62% APY at Velocity Credit Union. Both of these credit unions can be considered "all-access" credit unions since they make it easy for anyone in the nation to join.
Below is a comparison of the Discover Bank's 10-year CD, Ally Bank's 5-year CD and Velocity Credit Union's 5-year CD. The table shows the yields for each year after the CD is opened. These yields take into account the loss from the early withdrawal penalty. As you can see, Ally has the best rates when the CD is closed before 2 years. However, at 2 years, Velocity's CD takes the lead. Then at 3 years, Discover Bank takes the lead except at 5 years when Velocity's CD would be free of a penalty.
I decided to choose Velocity's CD instead of Melrose's CD since Melrose has a harsh and confusing early withdrawal penalty. Velocity's EWP is the standard 6 months of interest. I have more details about this credit union in my last Velocity Credit Union CD review.
As we have discussed many times in the last year, there are two risks if you plan to make use of an early withdrawal:
- The bank refuses to allow an early withdrawal
- The bank increases the early withdrawal penalty on your existing CD
The early withdrawal yields listed below are based on the spreadsheet developed by Bogleheads forum members. It's available from the Bogleheads Wiki: Comparing CDs. It should be noted that the following simple formula comes very close to this spreadsheet:
Post Penalty APY = (Full APY) x (D - P) / D
D = days into term when the CD was closed.
P = days of the early withdrawal penalty
These CD rates are based on the rates listed at the institutions' websites as of 9/8/2011:
Approximate Yields After Early Withdrawal Penalties
| Year of Early Withdrawal | Discover's 3% 10-yr CD latest rates | Velocity CU's 2.62% 5-yr CD latest rates | Ally's 2.14% 5-yr CD latest rates |
| Early Withdrawal Penalty | 9 months | 6 months | 2 months |
| year 1 | 0.74% | 1.30% | 1.78% |
| year 2 | 1.86% | 1.96% | 1.96% |
| year 3 | 2.24% | 2.18% | 2.02% |
| year 4 | 2.43% | 2.29% | 2.05% |
| year 5 | 2.54% | 2.62% (no penalty) | 2.14% (no penalty) |
| year 6 | 2.62% | n/a | n/a |
| year 7 | 2.67% | n/a | n/a |
| year 8 | 2.71% | n/a | n/a |
| year 9 | 2.75% | n/a | n/a |
| year 10 | 3.00% (no penalty) | n/a | n/a |
Searching for Top CD Rates
To search for nationwide CD rates and CD rates in your state, please refer to the best CD rates section of DepositAccounts.com.
Lets face it, the savers are the punching bag of the FEDs, no matter how you slice it or dice it.
Doing small tricks like the CD early withdrawal is the bottom line fishing to gain few pennies and lose the shirt of your back at the same time.
Not worth playing the FED’s game, admit defeat and lick your wounds and wait for better days (if they ever come).
A classic defeatist's attitude. Good for you. Fold. Play right into Benny's slanted (tortured) hand...
Ken has gone out of his way, on behalf of his readers, to elicit from Ally a statement that the EWP (early withdrawal penalty) will remain unchanged for existing CDs. However, we do not enjoy that same high level of assurance from other institutions, including those mentioned in this piece.
I'm not an alarmist. I do not believe any institution would alter an EWP for existing CDs under ordinary circumstances. However, this entire strategy relies on ability to do an EW under foreseen conditions. If that falls apart the entire construct falls apart. After listening to (only just small portions of) the speech last evening, and being once again reminded of this country's leadership vacuum, I see ever more likelihood of the kind of financial calamity that could force EWPs for existing CDs to become altered.
Thus, I believe nobody doing such deals as these should wander too far from the exit door. Owning long term CDs requires, IMHO, daily review and reevaluation, along with constant, finger-on-the-trigger management. And speaking for myself only, realizing you folks might be smarter and wiser, I'm not certain that even with that level of effort I will be quick or adept enough to pull the trigger before the trapdoor inevitably opens.
Being fanatic will not get you anywhere in life. You already admitted the sky has fallen, but refusing to admit defeat, makes you hypocrite. Ben never listens to the people, you are wasting your time. and living in false hope of better future on the bases of changes at the helm.
By the time you realize what has happen, your money will be eaten in half.
Keep thinking like that and be proud of your decision and stay till the end with 1-2% CDs, if that is what makes you happy, however, you can not tell people who have thrown in the towers, that they are cowards and you are victorious because you have never admitted defeat.
"I was hoping someone would pop in with a nearby bank offering 3% CDs."
I don't know where you are located but it appears Security Service and Randolph-Brooks credit unions are the only institutions here in Texas offering 3% or greater APY on 7-year certificates. Both of those have restricted membership and/or locale rules. Also, if you want to rely on a low EWP they are probably not very advantageous.
Btw, thanks for the choices for CDs. However, I think Garden City sounds like New York and that is too far from the radius I have given myself to travel for a CD rate. Thanks anyway.
Why are you so resentful and edgy?
Nobody is attacking you, I read all of the postings and concluded that everything was proper
and in order, until you started to pour your feeling on some of us.
You said that you can manage to live with low interest rates, yet, you are looking for at least 3% CDs.
We never kid around when the money are at question, yet, you admitted you just plaiyed jokes on us about your English and education.
You said that you don’t feel or like to feel defeated, yet, you have been calling and writing to the authorities about how low rates hurt you and like to see them higher.
I don’t blame some of the posters for calling you hypocrite, but your actions and postings point to it.
You are telling us not to read your statements, but you are posting in public forum, where everybody can read and post and react to your proud believe of being above us.
That is the feelings most of get, when reading your posts.
Don’t be fooled by having it in writing and is set in stone deal.
Including Ally bank, according to FDIC and FTC and banking regulations, any bank can call a ban on Early Withdrawals if the Early Withdrawals will cause the bank to violate any sub regulations like asset to deposit ratios or if the sub accounts where the customer CDs are held are not liquid or customer notice to Early Withdrawal is to short in time or massive Early Withdrawals by more then 1% of the customers CDs and many other variations can put stop to Early Withdrawals.
If you don’t believe this, just ask any banker, not CSR or a letter from the bank type by a CSR or the manager of the branch. Their word is not the banks or regulated policies governing the banking system.
Any bank has right to nullify or modify without prior notice any part of anything previously agreed upon. (the above sentence is on any bank agreement ever sent to you)
You guys are making bold claims without any evidence. Can you post this generic language or provide links which prove that all banks can unilaterally void EWP whenever they want.
The other bank adds: "We will consider requests for early withdrawal and, if granted, the penalty as specified above will apply". So, imo, there is nothing in either of these statements which guarantee one can get their funds out early. It is all up to the banks. Also, they know that most savers don't read all the fine print on their CDs but it's there to protect the bank's interest, not ours.
When I called and asked my banks about these clauses, I was told it is just something they add but they rarely have to refuse customers. But that still tells me I have to make darn sure I stick with 4 and 5 star banks and hope they don't get in financial trouble and our nation can always follow through with the insurance to protect our funds.
Within my limited ken, I have attempted without success to place myself in the bank's spot, endeavouring to answer the question: How do I invest these funds?
IOW, as a supposedly profit-making institution, where do I invest depositors' "five year" money beneath the constraint that I must provide them liquidity upon virtually zero notice, while garnering (for myself) only a sixty day interest penalty. My ignorance regarding a method of accomplishing this is not determinative. I'm not even a banker, no less a sophisticated one. So there could easily be vehicle(s) out there, completely unknown to me, that get this job done. But still, superficially at least for me, the entire setup does not pass the smell test.
Nobody is cashing in Ally Bank five year CDs today . . . well, scant few folks anyway. If it ever happens at all it will happen on an en masse basis, as some earth shaking event (financial or otherwise, but most likely financial) causes everyone simultaneouly to become liquidity focused. Their pledges notwithstanding, I seriously doubt Ally Bank is prepared for such an outcome. And if they are prepared, I have no clue how such preparation has been accomplished. Indeed and in fact, I'd love to know.
All the banks and credit unions where I have CDs do not have the language you cited. FYI, I would not purchase CDs or invest a significant amount of money in the bank you used as an example. Believe me there are banks out there that don't use this qualifying language. This is a choice you have when selecting a bank for a CD purchase.
If your proof is issued from the headquarters of Ally lets see it, otherwise I remain sceptical of your findings and posting.
Read paragraph h, m, it is conditional by PenFed approving your withdrawal.
https://www.penfed.org/pdf/accountsforms/688.pdf
Ally will send you the Ifs and Buts when you open the CD with the printed agreement addendum.
"If redeemed" has dual meaning, pertains to the closer and the institution, agreeing mutually to close the CD.
Notice, the party in “If redeemed” is missing, since two parties are required to close a CD.
I read paragraphs h and M, and I don't agree with your interpretation at all. In paragraph h, the redeemer is the certificate holder. The purpose of the paragraph is to determine the amount of the penalty if the certificate holder redeems the CD. Paragraph M gives Penfed the right to wait 60 days to redeem the certificate. Not great, but certainly not a full denial. There are banks and credit unions that give themselves the right to refuse EWP, but there are others that do not. I never purchase CDs from institutions that can unilaterally prohibit early withdrawal.
Don't focus primarily on the (written) terms of the CD . . though I concede a few grant the institution an option to deny EW. But that's not the point.
It will not, in most instances when the SHTF, be about terms. It will be about the ABILITY of an institution simultaneously to accomodate (a great many) early withdrawals and CD closures . . . without croaking.
With eager government participation and facilitation the USA is rapidly becoming a banana republic. At some point Americans will realize, doubtlessly all at once and amid massive shock and horror, that "the emperor has no clothes". At that point liquidity will become paramount, as long term CD money will be becoming worthless. The banks and financial institutions will be unable to cope. All this stuff has already happened in other countries over the years. Regardless you might disagree, the USA does not have an exemption. And on our current asinine course, it's just a matter of time.
We went through this in 2003/2004. The strategy wasn't as popular so there weren't that many closure requests. We only had two closure requests denied and one of those re-negotiated the penalty and still allowed closure.
99% of institutions do have the clause written such that they can deny a request. Some don't, but other than the claims of Ally, I can't think of any off of the top of my head.
Short-story, be trying to pull your trigger in the first waves. Also, I would make sure I have other shorter-term duration CDs just in case some requests are denied. I do believe laddering strategies work out the best in the end. :O)