Very High CD Rates Advertised in Newspapers - Are They Real?

Have you noticed ads in the newspapers which advertise very high short-term CD rates supposedly from FDIC-insured banks? These are quite common. Last year the FDIC mentioned these offers in its consumer news. Here's an excerpt:

Beware of an Advertised CD Rate Far Above the Competition – First, it could be a product issued by a company that is not federally insured and second, it could be a marketing ploy. In either case any money invested could be at risk. A company may advertise in the local newspaper a 5.0 percent interest rate for a six-month bank CD for consumers to invest. When a customer calls, he or she is told to come to the office to discuss the details. It turns out that the bank is paying only 5 percent on the first $1,000 - not 5.0 percent on any balance. Another situation to beware of occurs when the customer is informed that the bank will pay only 2.5 percent but the sales person for the company offers to add enough money to the CD purchase to make up the interest rate difference. When the CD matures, there is no similar offer on a new CD and the individual can be steered into purchasing a non-insured investment that may be a poor choice for the consumer but very lucrative for the sellers.

If the company does place the deposits with an FDIC-insured bank and it does add in a bonus to make up for the interest rate difference, it could be a good deal if you don't mind listening to their sales pitch. It would be similar to receiving a bonus after listening to a timeshare sales pitch. But remember they wouldn't be making these offers if they weren't able to convince a significant number of people to buy their non-bank products.

With this in mind, here are some examples of these CD ads that I've seen in today's papers.

From the 8/22/10 edition of the Austin American Statesman:

• 4.50% APY 6-month CD via Sun Cities Financial Group (512) 502-1715. Important small print: Yield may include a bonus. $25,000 deposit required. Sun Cities is not a bank.
• 5.60% APY 3-month CD & 4.30% 6-month CD via First Fidelity Tax and Insurance (512) 402-8514. Important small print: Yield may include bonus. We are not a bank. Minimums and maximums apply.

From the 8/22/10 edition of The Oklahoman newspaper:

• 5.01% APY 3-month CD via Firstar Financial Group of Central Oklahoma, LLC. Important small print: Firstar is a financial services firm that locates banks offering the highest CD yields nationwide; rate and deposit subject to availability; rate will be provided by the local Firstar office as a Promotional Incentive.

The important question to ask is what's the maximum deposit that will qualify for the advertised yield. If the maximum deposit is small and it's only a 3-month term, the bonus they will add will likely be small. For example, the total amount of money earned from a 5.60% APY 3-month CD with a $10K deposit is only $140. If the bank they are using is paying 1.00% for the 3-month CD (which is competitive these days), the money earned on a $10K deposit is $25. So the money you would receive would come from the following:

• $115 bonus provided by the financial company
• $25 interest from the bank's 1.00% 3-month CD

If the maximum deposit for the 4.50% APY 6-month CD is $25,000, that could add up to a nice bonus:

• $406 bonus provided by the financial company
• $156 interest from the bank's 1.25% 6-month CD

Note, these bonus amounts and CD yields are just guesses about what may be offered. They're just intended to show how the companies are able to offer the high yields they are advertising. Do you have experience with these types of companies? Are there similar offers in your local paper? Please leave a comment and share your experience.