What are certificates of deposits?
People should earn not just to spend but also to save. Securing some amount of money is one way of being prepared for the future. Life is just so unpredictable it always pays to be ready with whatever circumstances it may bring. People may decide to start allotting money for savings due to several reasons: it could serve as savings for college education or for retirement; or it could also be for major purchases like a house and lot. On the other hand, it might just be savings for future emergencies.
One of the best ways on how people can secure their money in the bank is through CDs or certificates of deposit. This is one form of deposit that is promising high interest rate, one that is a lot higher compared to traditional means of deposits. Certificate of deposit is available from different types in banks, savings and loan association, brokers and credit unions. This type of deposit is also associated with a time deposit primarily because one of its distinct features is that it has fixed term. This means some CDs cannot be withdrawn before the date of maturity.
The depositors and the bank will have an agreement about the fixed amount and period of time that will be followed. The term is an important factor because the longer the period the deposit cannot be withdrawn, the higher interest rate it can receive. Depositors, however, should always keep in mind that the term defines how long the deposited money will be inaccessible.
Maturity is the term used to refer to the time when a deposit is inaccessible. After maturity, a depositor can withdraw their deposit plus the interest the account earned. Maturity can range from 1 month to several years. Depending on the client’s preference, a financial institution can offer CDs which expire at 3 months, 6 months, 1 year or more. Some CDs may allow the depositor to withdraw money from the account, but this is typically subject to limitations and can cause huge penalties. Most banks automatically renew the account if the fund remains unclaimed after the maturity date and grace period passed. This would mean another specific period of time before the depositor could withdraw his/her savings.
There are also different types of CDs. If the person will deposit a $100,000 or less the transaction will be called small CD but if the amount is more than a hundred thousand dollars the deposit will be called Jumbo CD. The different types of CD may display individual benefits and risks thus a careful analysis is necessary before jumping into any deal.
