Advantages & Disadvantages of a Certificate of Deposit

Terms

One of the advantages of CDs is that you can choose the term you want. Terms vary from three months to five years. The longer the term, the higher the rate of interest you will receive.

Grace Period

Another advantage of owning a CD is the grace period. After the CD matures, you have a seven-day grace period during which you can decide what you want to do with your money.

Fixed Rate

CDs are safe investments because the interest rate is fixed and does not change during the entire term. You never have to worry about a floating interest rate. CDs generally pay a higher rate of interest than savings accounts.

Penalty

As of 2009, one of the disadvantages of CDs is that you cannot take your money out before the maturity date; otherwise, you will be subject to an early withdrawal penalty.

Automatic Rollover

Another disadvantage is that if you do not take some type of action when your CD matures, it will roll over automatically at prevailing interest rates, which may not be the highest rates available.

Amount

Purchasing a CD requires an investment of $500 or $1,000--much larger than an opening deposit for a savings accounts.