Short Term CD Rates: a Brief on the Factors That Affect the Rates
Certificate of Deposit or CD is a safe investment when it comes to life savings. As an investor, you should understand that the CD rates differ based on the bank as well as the term. It is important to find the right product with the right bank to make most out of the investment. CD basically is a time deposit that can be availed by the customers from banks as well as from Credit Unions. Most people use the CD deposits to get a fixed interest rate as a return.
The term has to be decided before making the deposit and the money cannot be withdrawn before the term ends. If the customer withdraws the money before the term ends, there will be penalty charge. Most of the CD’s vary from 3 months to about 5 years. There is a huge variation in the CD rates between the short term ones and the long-term ones. In general the long term CD’s usually provide good rates with high returns. This happens because the money is deposited for a longer period and the customer would not access it and the bank can make use of the money for its business strategy in return for an interest. In case of a short-term CD which might be for 3 months or 6 months, the money deposited stays in the account for a very short period and hence the interest rates are usually lower.
Other factors that guide the CD rates are the bank funding needs and the Fed Funds Rate. The Federal Reserve Bank usually decides the rate that the bank should charge to the customer. When there is a drop in this rate, it invariably affects the bank rates. Again, the Federal Bank rate depends on economic conditions. If the economy is good, the rates are good.
Another factor that affects the rate and the decision of the term is the bank’s funding needs. This varies from bank to bank and based on its own strategy to determine the rate. Short-term CDs are best option during recessions or any other financial crisis. It is advisable to take up a long-term CD only if economic condition is good.
If the bank that you choose has enough funds already, they would not provide rates above the median rate that has been recommended by the Federal Reserve Bank. If the bank is in need of deposits, they might offer higher rates. So while choosing, you should consider this factor as well. Similarly, the amount of money that you deposit might also have a say in the interest rate.