We all know that long term CDs have higher rates than short term CDs… or so we thought. A unique Ally Bank CD set of rules actually lets us take advantage of the higher rates with a shorter term.
Are CDs Obsolete? That’s the question we’re discussing this week. As CD rates remain low, we’re always on the lookout for alternatives.
I eliminated my CD ladders awhile ago due to the interest rates, but my kids still have CDs that are renewing at ultra low rates, so I’m interested in finding a better CD product for their money.
CD Strategy to Lock in Higher Rate
One of the Ally Bank CD strategies that is gaining momentum is to purchase a 5 year CD with plans to pay the two month interest penalty when you access the money, making it financially a better option than short term CDs.
Ally Bank opened the door for this option when they made a standard 6 month interest penalty only 2 months on their CDs.
How it Works
The 5 year APY is 2.95%. The 1 year APY is 1.49%. The fee to withdraw your CD before maturity is 60 days’ interest.
If at the end of one year, you break your CD, here’s what it might look like if you invested $5,000:
- Open a 5 year Ally Bank CD at the 2.95% APY.
- Earn about $148 at the end of year one.
- Close your CD and forfeit $25 in interest.
- Net about $123, which is equivalent to about 2.46%.
Finding a 1 year CD that pays 2.46% is next to impossible, so it’s a no brainer in my mind.
This example ignores that interest is compounded daily. But it’s a strategy that’s makes the 1 year CDs unnecessary if you want to earn the highest rate.
Locking In Low Rates
What if interest rates go up and you don’t want to lock in at such low rates? With the Ally Bank CD, you can break your CD, pay the penalty, and open a new CD at higher rates.
I had my mom open a Ally Bank CD this week, with the intention of keeping the money in the CD for 1-2 years. She reported that it only took a few minutes to open. I’ll be opening mine soon, as soon as each of the old CDs matures.
Have you looked into the Ally Bank CDs? Are you planning to use the penalty feature to get higher rates?
Thanks for the tip, I’m going to move over half my Emergency fund to Ally due to only the 60 days of interest penalty. If I need that money the 60 days of interest is the least of my worries.
Very clever. I like it. A lot of things I read I think to myself aren’t worth the time/effort. For example, I’m not into the whole credit card arbitrage thing.
But this is one I’m going to seriously consider.
Just 1 caveat, they can’t change the penalty once you lock in a CD correct? What about switching to a higher rate? If you switch to a higher rate, could there be a new fee structure with this “new” cd?
Good post, this is a very easy way to get some extra interest, however, I think if you look hard enough there are better choices for investing that are as safe and liquid as a CD, depending on how much you have in savings and can afford to spend freely.
Good to know! Thanks for the tip.
Just tonight, before reading this article, I had my girlfriend open a 5 year at Ally for just this reason. We also opened a 2 year “raise your rate” CD because I absolutely believe the rates MUST go up within and year and Ally WILL eventually change their 60 day penalty back to the previous penalty. I’m not sure it was 6 months, though. For some reason I’m thinking 3 months.
Isn’t there a clause in some CD agreements that the bank is not required to honor an early termination request?
(I have not studied Ally’s agreement, so do not know if this applies to them)
I am suspicious of Ally Bank. I had to call them after I bought a couple of CD’s. They had the wrong interest rate. You have to call them to redeem the CD’s, you cant do it online. I don’t trust them.