Ally Bank Increasing Early Withdrawal Penalty on New Long-Term CDs

For the last several years, Ally Bank CDs had one important feature that gave it a big advantage over CDs at other banks. That advantage was a small early withdrawal penalty (EWP) of only 60 days interest. I’m afraid that’s coming to an end. Ally Bank’s EWP for CD terms of 3, 4 and 5 years is going up. However, it’s important to note that Ally Bank is doing the honorable thing by making this change only to new CDs and renewed CDs. This won’t impact existing CDs. The new EWP will take effect on December 7, 2013, and there will be no changes to CDs opened or renewed before this date. Ally Bank will soon be updating its website to note this change, and it will be sending notification to customers early next week.

Below is a summary of the new early withdrawal penalties. As I mentioned above, the change only impacts CDs with terms of 3, 4 and 5 years. Also, it only affects new CDs or CDs renewed on or after December 7, 2013.

• 3 year CD: 90 days’ loss of interest
• 4 year CD: 120 days’ loss of interest
• 5 year CD: 150 days’ loss of interest

Update 10/26/13: Ally Bank is now listing the new EWPs in the fee section of its CD page.

You can use our Early Withdrawal Penalty Calculator to see how this change will affect Ally CDs. For example, with the current Ally Bank 5-year CD that has a 1.60% APY, an early closure after one year would result in an effective yield of 1.33%. The 60-day EWP basically reduces the yield from 1.60% to 1.33%. If this yield remains the same on December 7th and you open the 5-year CD and close it early after one year, the effective yield will be 0.93%. As you can see, the larger EWP reduces the effective yield of the CD that’s closed early.

The effect of the EWP goes down when the closure is delayed. As you can see in the Early Withdrawal Penalty Calculator, the difference in yield at year one is 40 basis points. At year four the difference is only 10 basis points. Of course, if the CD is held to maturity, the EWP has no impact.

My Take

I’m disappointed in this change. However, I’m relieved to see Ally Bank is not making retroactive changes like what two credit unions did (see post). Also, it’s nice to see Ally Bank is communicating this change early. As I mentioned above, customers will be notified directly by Ally Bank of this change more than a month before the change takes effect.

Finally, it should be noted that the new EWPs are still competitive compared to other banks. Below is a summary of the EWPs of 5-year CDs for a few banks and credit unions:

• Pentagon Federal Credit Union: up to 365 days
• Discover Bank: 6 months
• Barclays: 180 days
• Nationwide Bank: 360 days

I’m afraid Ally Bank is one of many banks that have increased early withdrawal penalties this year. It’s clear they realize that customers will likely close CDs early to take advantage of higher interest rates when this awful interest rate environment finally ends. I know some readers still have concerns that banks may refuse early withdrawal requests. As we have discussed many times, several banks (including Ally) have clauses in their disclosures which give them this right. I can’t say how likely banks will make use of these clauses. The concern is that it will be more likely if interest rates shoot up.