How to find the best 4-year CD rates
Interest rates are typically the first thing you look at when choosing a CD. The best 4-year CD rates are typically found at online banks and credit unions, but always check your neighborhood bank’s CD interest rates before deciding. Online banks don’t have the overhead expenses that brick-and-mortar banks pay. As a result, they can usually offer the best CD rates. Additionally, make sure your money is protected at whatever financial institution you choose. Accounts at banks should be protected by the FDIC. Credit union accounts should be protected by the NCUA.
How to compare the best 4-year CD rates
Here are some other factors besides APY to consider when comparing 4-year CDs:
Minimum deposit: Some, but not all, CDs have a deposit requirement you need to hit in order to open an account. Look at a bank’s minimum deposit requirements before deciding on a CD.
Withdrawal penalties: Most CDs charge penalties if you withdraw money from your account before it reaches maturity. Four years is a long time to tie up your money. Paying withdrawal penalties is a surefire way to sabotage your CD earnings.
Compounding interest: CD interest usually compounds daily, weekly, or monthly. You can earn slightly more money with a CD that compounds daily.
Interest payouts: Some banks give customers the choice of what happens to earned interest. Common options include monthly, quarterly, or annual payouts. Several also allow you to add interest earnings to your CD balance. There are some tax implications to each strategy, so talk with your bank before deciding.
CD maturity: Automatic renewals are becoming more common. That means your 4-year CD is automatically renewed if you don’t notify your bank before the end of the grace period. Usually, the best strategy is to avoid automatic renewal. Allowing the bank to re-enroll you could lock your money into a low-interest CD.
FDIC insurance and monthly fees: Check that the bank you choose is FDIC insured. This insurance will cover up to $250,000 per depositor. Fees aren’t common with CDs, but it’s always good to check to make sure there are no extra fees. It’s a good idea to verify details like these as you don’t want any surprises down the road.
What to consider when choosing a 4-year CD
A 4-year CD can be a great investment, but it also has its drawbacks. Here are some pros and cons to opening 4-year CDs:
Higher rates: Four-year CDs offer better rates than you find with most savings and money market accounts.
No risk of interest rates falling: CDs have fixed rates. This potentially means you can lock in a high interest rate for four whole years. Even if interest rates fall during your 4-year CD term, your rate will remain the same.
Predictable returns: The fixed interest rate also means you can easily calculate precisely how much interest you’ll earn over a four-year term.
Interest rates may rise: Over the course of four years, it’s possible interest rates could rise. If you’ve tied your money into a 4-year CD you won’t be able to take advantage of increases in market rates until the CD reaches maturity.
Penalties: The reason you can earn a higher rate on 4-year CDs is that you can’t withdraw funds until the CD matures. You’ll pay costly early-withdrawal penalties if you need to access your cash during the four year period.
Inflation risk: If you tie your cash to the same rate for four years, there’s a risk your savings will not keep up with inflation. One way to protect yourself from these risks is to build a CD ladder. This strategy gives you increased flexibility while still allowing you to take advantage of the higher APYs of 4-year CDs.
Alternatives to a 4-year CD
Four-year CDs offer a guaranteed interest rate, but they are not right for everybody. Here are some other options to consider.
High-yield savings account: These savings accounts have comparable rates to CDs. However, they don’t tie up your money for fixed periods of time. Customers have access to their money when they need it, plus higher interest rates.
Money market account: Money market accounts (MMAs) are another bank account type to check out. They combine the interest-earning of a high-yield savings account and with certain checking account features. Many MMAs come with ATM access and check-writing privileges.
Investments: You may end up earning more over time by investing your money on the stock market rather than opening a 4-year CD. However, you may need to wait longer than four years to see those returns. Whether you go through an online stock broker or put money into a retirement fund, diversified portfolios have historically earned higher returns in the long run. Be aware that this route carries more risk. Money you invest will not be FDIC-insured and the value of stocks can both increase and decrease.
There are many advantages to 4-year CDs, like higher rates and guaranteed returns. Determine what’s important to you and weigh your options to see if a 4-year CD is right for you.
View more information: https://www.fool.com/the-ascent/banks/best-4-year-cd-rates/