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By Lindel Garvint
Certificate of Deposits, better known as CDs or time deposits are becoming more and more popular in today’s economy. This type of account is an interest-bearing deposit that guarantees a specific rate of return. The interest that is attached to a CD far surpasses the interest that is attached to a more traditional savings account. The reason for this is simple, those who invest in CDs commit their money for a specific amount of time before they will withdraw it or they could incur sever early withdraw penalties. This type of account can range from 30 days to 5 years depending on the terms that are agreed upon.
Benefits of CDs
When it comes to purchasing CDs there are a many obvious benefits. The most noticeable benefit is the much higher interest rates than a regular checking or savings account. One of the greatest benefits to purchasing CDs over other forms of investments is that they are almost always insured. This insurance allows investors to recoup any losses if the bank should fail up to $250,000. The last benefit is that CDs are considered as low-risk. The way this is accomplished is because each person who purchases a CD will get a predetermined calculation on the worth of their investment, regardless of changing interest rates or if the bank fails.
Drawbacks
CDs are considered a sound investment, but they are not perfect, and do come with some drawbacks. This type of investment is not known to offer high returns, even though they are protected from the fluidity of rising and falling interest rates. This is why they are used as more of a short-term investment option. It is important to remember that with the low risk comes the low rate of return.
If the potential purchaser would like to have a higher rate of return, but still keep the risk to their investment as low as possible, he or she can opt for a long-term CD, which usually carries a higher rate. While the risk is low even with longer-term CDs the investor does run the risk of rising interest rates during their investment period, which can result in being stuck with a lower interest rate until the CD matures.
Remember that this type of investment does carry major withdrawal penalties. This can result in the purchaser not only losing the interest that has incurred but some of the principle as well.
What to Look For
Like any other investment it is always important to do research. It is important to compare the rates of CDs between financial institutions. This will ensure that the purchaser will get the highest rate of return on their investment. It is important for investors that do not have much money to invest or those who may need to be able to get to their money invest in short-term CDs in the beginning. This will help avoid any potential penalties.
It is important for those who own CDs to research ways to relock their investment at higher interest rates, if they increase before the CD matures. This can be a major advantage for the investor and researching this possibility thoroughly before purchasing their CD, can ensure they get the highest rate of return possible. While he or she may not be able to enjoy the exact same increase as a new purchase, they will be able to increase their rate. It is very important for every CD owner to be aware of this option and to take advantage of it if the need arises.
About the Author: This article was penned by Lindel Garvint, a senior copywriter for Ratelines.com where you can find excellent information on
cd rates
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